Low Rate 15 Year Mortgages Help Pay Off Debt

More homeowners are taking advantage of low interest rates to refinance into shorter terms, such as 15 year mortgages, to pay off their mortgages sooner, sometimes even if it means higher monthly payments.

During the first half of the year, 26 percent of homeowners who refinanced opted for a 15 year fixed rate mortgage, compared to 18.5 percent last year, according to data from CoreLogic, a financial data provider.

With interest rates at all-time lows, many people finding that they can afford higher monthly payments of shorter terms. But even if their monthly payments are significantly higher, some homeowners will bite the bullet, planning to pay as little interest as possible and owning their home free and clear of mortgage debt as soon as possible.

Paying the mortgage is like putting money into a required savings account for them. In better times, leveraging your home to get a mortgage as large as possible was popular. When the stock market was booming homeowners preferred putting money into stocks for bigger gains. After the stock market crashed, investors became disillusioned with stocks and a more frugal savings ethnic is again popular.

Moving from a 30 fixed rate mortgage to a low-rate 15 year mortgage term is the most popular refinancing move, but homeowners also use 20 year terms. Although homeowners pay off their mortgage twice as fast with a 15 year term than 30 years, their monthly payment is not twice as much because of the lower interest rate.

The average 15 year rate was 3.86 percent compared to the 30 year rate of 4.36 percent, according for the week of Aug. 26, according to Freddie Mac.

A 15 year mortgage of $200,000 at 3.84 percent would have a monthly payment of about $1463, while a 30 year mortgage of the same amount with a 5.5 interest rate would have a monthly payment of $1135.

“While homeowners are choosing the safety of fixed-rate mortgages in large numbers, at the same time many borrowers are now looking at paying down their mortgage balances faster by choosing a shorter mortgage term of 15 or 20 years instead of 30,” said Frank Nothaft, vice president and chief economist for Freddie Mac.

“When you can only earn a very low interest rate on your CD or money market accounts, and returns on other investments remain extremely uncertain,” Nothaft said, “it can make sense to pay yourself 4.5 or 5 percent by eliminating some mortgage debt whether by making extra payments or going for a shorter loan term.”