Even today, the most popular type of mortgage financing comes with a 30-year term and fixed interest rates, but another loan type is growing far more popular as a result of the continued low interest rates available nationwide as well.
These days, consumers are slowly beginning to favor 15-year fixed-rate mortgages over their 30-year counterparts because of just how affordable they’ve grown in the last year or so, according to a report from the Christian Science Monitor. Data from the Mortgage Bankers Association, for example, shows that 15-year fixed-rate mortgages accounted for about 23 percent of all mortgages - including new loans and refinances – issued in November. And while that may not seem like a large portion of the marketplace, it’s up 51 percent from the same month last year.
Further, information from the tracking firm CoreLogic shows that these 15-year deals also made up just 8.5 percent of such agreements as recently as 2007, but accounted for 35 percent in 2012, the report said. The reason for this is simple: Rates on them are now so low compared with even 30-year fixed mortgages, which themselves have become extremely affordable, that homeowners can bear the additional, larger monthly payment because they’ll save tens of thousands in interest charges over the life of the loan.
“Consumers are financially savvy, and they recognize 30-year fixed mortgages are a bargain,” says Frank Nothaft, chief economist at the government-sponsored mortgage-backing giant Freddie Mac. “But then they say, ‘Gosh, a 15-year fixed is three-quarters of a percentage point even lower’… You can lock that in and never have to worry about refinancing again.”
The benefit is almost immediate with 15-year mortgages as well, the report said. Randy Wacker, vice president of mortgage lender for Gesa Credit Union in Richland, Washington, told the news source that by the second year of such an agreement, more than half the payment is going to reducing the loan’s principal rather than interest charges, and that doesn’t happen until roughly the 11th year of a 30-year mortgage.
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Mortgage rates are expected to hover near the current low levels observed nationwide for some time thanks to the Federal Reserve Board’s latest round of bond-buying, known as qualitative easing. It’s unclear exactly how long the central bank will artificially depress interest rates with this method, but housing affordability is currently hovering at or near all-time highs as a consequence.