Exactly six months after Freddie Mac’s 15-year fixed rate reached an all-time low of 2.1% on July 29, we end 2021 at 2.33%. That’s just 23 basis points higher and less than a one-quarter percent from its all-time low.
Compare that with Freddie’s 30-year fixed ending 2021 at 3.11%. The 30-year all-time low was set Jan. 7, 2021, at 2.65%. That’s 46 basis points higher or nearly one-half percentage point.
For the year, Freddie’s 15 averaged 2.27% while its 30-year rate averaged 2.96%. That’s an annual average spread of .69% or nearly three-quarters of one point.
In my long mortgage originator industry experience, the 15-year fixed has typically run one-half point lower than the 30-year fixed. Right now the 15-year fixed is performing much better than historical mortgage data might indicate.
So, why would these short-term loans run so much lower than traditional, long-term mortgages?
Mortgage money works inversely to the Certificate of Deposit savings world, for example. A bank typically offers a higher interest rate if an investor is willing to tie up a CD for three years compared with just one. When it comes to home lending, the shorter period of time you tie up a lender’s money, the better terms the mortgage lender will typically offer. That’s why 15-year mortgage money is always cheaper than 30-year mortgage money.
In my experience, most borrowers don’t think much about a 15-year fixed compared with a 30-year fixed because real estate agents or mortgage originators push for higher numbers. Industry compensation is almost always based on the size of the transaction. More expensive homes and larger loans mean bigger paychecks. Shorter-term mortgages with higher balances and higher payments create more daunting loan qualifying pressures.
Everything today feels like a whipsaw. Surprise is the new normal when it comes to calculating COVID and its consequences on broad economic activity. It’s better. It’s worse. More people are dying. More survivors. But sickness is spiking. Lockdowns. End of lockdowns. Bring back the mask mandates. But don’t you dare lock us down again. There you have it.
And consequentially, COVID-related and surprisingly low 15-year fixed-rate mortgages are the new normal, too.
Besides finding an additional quarter-point rate savings compared with historical 15-year behavior, you’ll pay a lot less over time. And, you’ll have the mortgage-burning party a lot sooner.
Today, we are at roughly a three-quarter spread on mortgage rates comparing the 15-year and the 30-year fixed in the local market.
Consider well-qualified borrowers (California rates tend to be cheaper than Freddie national averages) can catch a 1.875% rate on a 15-year fixed for 1.75 points. On a $647,200 (the maximum 2022 Freddie conforming loan limit) the principal and interest payment would be $4,128.
The total 180 months of payments (15-years) is $743,040 with an additional $95,840. Compare that with a 30-year fixed at 2.625% with 1.875 points cost. That monthly payment of $2,599 times 360 payments (30 years) is $935,640 or $192,600 additional dollars.
Yes, the monthly, 15-year payment is about 60% higher than the 30-year payment. Yes, over time there are fewer tax-deductible dollars on the 15-year because you are paying a higher interest rate and borrowing the money for a longer-term on the 30-year fixed. Yes, I will get many emails from column readers telling me it’s smarter to leverage money by investing in real estate, bitcoin or the stock market.
I’ve been preaching to my clients for more than 35 years to pay off their mortgage as fast as they can. It’s one less retirement budget surprise you’ll need to grapple with. I’m not changing my advice to you now — especially when you can pick up another quarter-point on the cheap.
Freddie Mac rate news
The 30-year fixed-rate averaged 3.11%, up six basis points from last week. The 15-year fixed-rate averaged 2.33%, up three basis points from last week.
The Mortgage Bankers Association did not report mortgage application volume as it was closed for the holiday week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $152 less than this week’s payment of $2,767.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.49%, a 15-year conventional at 2.275%, a 30-year conventional at 3%, a 15-year conventional high balance ($647,201 to $970,800) at 2.375%, a 30-year high balance conventional at 3.125% and a jumbo 30-year fixed at 3%.
Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye catcher loan program of the week: A 15-year fixed at 2.625% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com.