One of the most enduring debates in the realm of mortgages revolves around choosing between a 15-year or a 30-year mortgage. While new homeowners often lean towards the 30-year option due to its lower monthly payments, now could be an opportune moment for some homeowners to consider the benefits of a 15-year mortgage. Renowned financial expert Clark Howard highly recommends the 15-year mortgage for those who qualify, emphasizing that it leads to paying significantly less interest over the long term, even if it entails higher monthly payments initially. For recent homeowners, there exists a strategic opportunity to refinance into a 15-year mortgage, a move that can prove to be financially advantageous.
Key Points:
– Refinancing can reduce monthly expenses, particularly for homeowners with high initial interest rates.
– Clark Howard advocates for refinancing into a 15-year mortgage to secure a lower rate and expedite debt repayment.
– Selecting the right cash back credit card can yield substantial yearly earnings with benefits such as up to 5% cash back, a $200 bonus, and no annual fee. Apply now (Sponsor)
New Homeowners Facing Historically High Interest Rates
The volatile nature of the United States’ monetary policy and fluctuating interest rates have contributed to elevated mortgage interest rates for homeowners who made purchases within the last 1-3 years. The Federal Reserve’s actions to combat inflation led to multiple rate hikes, burdening many homeowners with high mortgage payments. While 30-year fixed mortgage rates surged close to 8% in November 2023, a gradual decline has since ensued and may continue, especially if inflation remains subdued, prompting potential rate cuts by the Federal Reserve. Reduced government spending could further contribute to declining rates as the government aims to reduce its debt burden through fewer bond issuances.
Refinancing presents an opportunity for homeowners who purchased homes at the peak of interest rates to secure a lower rate. Despite the option of a 30-year mortgage, Clark Howard outlines compelling reasons why opting for a 15-year mortgage could be a more favorable choice.
Experience in Mortgage Payment Management
Homeowners who have diligently maintained their 30-year mortgages for several years have gained valuable experience in managing their payments. While the initial process may have seemed daunting, these homeowners now possess a clear understanding of their financial obligations. Some may consider refinancing into a 30-year mortgage to ease financial strains, but those who are comfortably meeting their mortgage commitments may find the prospect of a 15-year mortgage appealing. Despite the higher monthly payments, this option allows for quicker debt repayment, especially beneficial for primary residences. Conversely, real estate investors often prefer retaining 30-year mortgages to preserve their cash flow.
Advantages of Lower 15-Year Mortgage Rates
The allure of 15-year mortgage rates lies in their affordability and potential savings. Refinancing from a 30-year to a 15-year mortgage can result in lower rates for homeowners who purchased during periods of high interest rates. This transition may not necessitate as
You have the opportunity to secure a lower rate by opting for a 15-year mortgage, according to Howard. Traditionally, this type of mortgage comes with a rate that is 0.6% lower than that of a 30-year mortgage. However, the current data indicates a larger gap, with the St. Louis Fed reporting a difference of over 0.8% between the two rates.
As mortgage rates have been declining since the beginning of the year, housing affordability is expected to improve further if this trend continues. While the monthly payments on a 15-year mortgage may be higher, they could be justified considering your rate and the current market conditions. By choosing a 15-year term instead of a 30-year one, you can become debt-free in half the time.
It is crucial to assess your financial situation to determine if you can comfortably manage the increased monthly payments of a 15-year mortgage while meeting your other financial commitments. Following Clark Howard’s advice, homeowners can accelerate their path to debt freedom by making slightly higher monthly payments.
