15 Year Mortgages Back in Style

Posted on August 31st, 2010

You’ve seen the headlines: 30-year fixed-rate mortgage rates are at record lows. What’s getting less attention, however, is that 15-year rates (and most other mortgage rates, for that matter) are also at record lows. According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 15-year fixed rate is now only 3.86%, exactly 50 basis points below the average 30-year rate. It carries lower fees/points, too.

While this trend is being ignored by the media, borrowers have taken notice. In the first half of 2010, “26% of homeowners who refinanced chose a 15-year fixed-rate mortgage…During all of 2009, 18.5% of borrowers who refinanced opted for a 15-year term. About 9.4% did so in 2007.” While comparable figures aren’t available for new mortgages (i.e. not refinancings), anecdotal reporting suggests a similar trend, though perhaps not quite to the same extent.

15-year mortgages have always been more appealing to refinancers. That’s because for those obtaining a new loan, the difference in the monthly payment between the 30-year and 15-year loan can be overwhelming or even unaffordable, since it is more likely to exceed industry Loan-to-Income limits. When the mortgage is refinanced, however, it is likely that the principal will be lower (as a result of many years of payments) and hence, the higher payment under the 15-year loan is less likely to be an obstacle. In addition, by refinancing from a 30-year loan into a 15-year loan, you probably won’t ultimately shorten the effective duration of your loan by that many years. For example if you wait 10 years to refinance from a 30-year loan into a 15-year loan, you will ultimately pay interest for 25 (15 + 10) years, which is not significantly different from the original duration of 30 years.

The savings from a 15-year loan (compared to a 30-year loan) can be substantial. Not only does interest accrue at a lower rate, but there are aggregate savings in interest from repaying the loan over a shorter duration. On a $250,000 loan, for example, you can expect to save $150,000 over the life of the mortgage, based on current rates. On the other hand, as I mentioned above, the monthly payment will rise by around 25-50%. For some, the increased pressure from having to make a larger payment each month offsets the overall savings in interest.

As a compromise, some financial planners recommend clients obtain a 30-year mortgage, and simply make larger payments on them each month, for as long as it is affordable. This way, borrowers can still achieve interest savings over the life of the mortgage, while still retaining the flexibility to make the lower required payment in the event of financial hardship. However, it’s important to understand that the price paid for this flexibility is a higher (i.e. 30-year) mortgage rate.

For those of that are considering a 15-year mortgage, you can use our Mortgage Loan Comparison Calculator to determine the difference in monthly payment and overall savings, compared with a 30-year mortgage.

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Top Credit Questions: Dealing With Difficult Debt

Posted on August 31st, 2010

Facing debt is an issue most consumers can relate to, especially the financial and emotional toll it can take. For these tough issues, Credit Karma members reach out to each other to figure out how to deal with difficult debt through the Credit Advice Center:

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Would like to know which one hurts your credit score worse: making house payments and letting the credit cards go late, or letting house payments go late and paying off credit card debt. We are at the point of letting our house go and trying to salvage credit, so we can purchase a house later.
Asked by rnchopper2

This is truly a difficult situation, and I’m sorry you’re faced with such a hard decision. In fact, you’re one of far too many Americans contemplating this tough choice, with many of them choosing to a href=”http://www.marketwatch.com/story/more-people-skipping-mortgage-to-pay-credit-cards-2010-03-05″ target=”_blank” rel=”nofollow”>forgo mortgage payments in order to pay their plastic. But before you jump on this bandwagon, let’s take another look.

Since you are most concerned about salvaging credit, consider the consequences. If you default on your credit card payments, it’ll show up on your credit report after 30 days, and after 90 days your credit card is in danger of being closed by your credit card issuer. This will affect your payment history as well as your credit utilization, ultimately impacting your credit score. If you default on mortgage payments for a prolonged period of time, you are in danger of losing your home to foreclosure. Foreclosure will utterly wreck your credit score, plus it leaves you without a roof over your head. A closed credit card and outstanding debt is pretty bad for your credit report, but a foreclosure is one of the worst black marks to have. Check out the damage points of both.

While letting your credit card payments go will hurt your credit score and risk canceling your card, letting your mortgage payments go leaves you without a home and a foreclosure on record. In these tough times, prioritize your finances according to what is most important and necessary. After that, rebuild your credit with a secured card and re-establish good payment history over time. Best of luck to you.

Is it better to make payments towards a collection balance or two make a settlement at a lower rate?
Asked by Ashtex12

I was in the same situation. I decided to settle–it’s better than letting the credit remain unpaid. One year later I was finally able to begin rebuilding my credit (more responsibly, of course), and one year after that my credit score is 769. It can be done–good luck to you. – abflex

Paying the settlement is worse for your short-term score, but better for your long-term score. The account is a problem account as long as it is there…–phnxangell

I think paying the whole balance in installments is better because it looks better on your credit that your paying the monthly balance on time…however I’m in that situation too…–TinyB

I’ve heard that after 7 years the debt goes “away” but what happens when a debt collector sells the debt off to another collection agency?
Asked by Ninny413

The 7 years is for reporting but has nothing to do with its legal status. For example, a credit card will have a statute of limitations to file suit of 3 years I believe in California but an auto loan will have a SOL of 15 years in Ohio. It depends on your state and the type of debt…–camalott4

The debt is still valid after 7 years, and companies may still pursue you to get paid…–phnxangell

These are called junk debt buyers. They buy your old account as part of a portfolio for pennies on the dollar, they try to collect for the full amount of the old debt, usually plus interest… The more savvy you are about your legal rights in this matter, the better…–free4ever

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Stop by the Credit Advice Center yourself to post your own credit question or post some smart answers of your own!