When you call around or do some online research about fixed mortgage rates, you’ll typically find lenders touting either a 30 or a 15 year rate. But there are some differences regarding how these rates are set. In general, a 30 year rate is priced against current market conditions while most 15 year rates are set by the individual bank. In fact, you might find out that most lenders offering second lien rates only offer them in 15 year terms.
Historically, the 30 year rate has always been a bit higher than the 15, at least in terms of the individual rate. That’s because the loan term for the 15 year is amortized over a much shorter period than the 30 year. However, rates today are looking closer and closer like the 30 year will be posting even wider differences between the 30 and 15. Most banks will price their second lien rates internally while at the same time pricing the 30 at market rates. You can follow the 10 year Treasury Bond and see the trend comparison between the 30 and the 15 year treasury. They tend to follow the same path.
You can look at historical rates and see that while the 15 and 30 year rates follow a similar path (when one goes up, so does the other) but the spread has been relatively close. Freddie Mac’s most recent mortgage rate survey reported the average national rate came in at 8.00% while many banks and credit unions will price their second liens in competition with other second lien lenders.
That’s quite the word salad, I know, but the bottom line for consumers is, which one is better? 30 or 15? There’s really no difference as to which term is better, they’re both fixed. What’s important here is which one is better for your situation.
Because the 30 year loan is stretched out over a period twice as long as the 15 year, the monthly payments will be lower. The advantage with the 15 year term is that while the monthly payments will be higher, there is much less interest being paid over the life of the loan. If you’re pushing debt ratios with the 15 but still qualify, if the higher payments do make your wallet feel a little uncomfortable, you can always take the 30 year term and make extra monthly payments as if you were really on a 15 year term. Prepayment penalties for traditional fixed rate home loans are a thing of the past, so don’t worry about that.
If it were me? I’d probably take the 30 and make extra payments at my convenience. Your loan officer can help guide you through all the ‘what ifs’ about different loan terms.
