Rise in mortgage rates makes 15-year loans more attractive

The slow but steady rise in 30-year mortgage rates suggests that many borrowers should opt for a 15-year loan instead. Rates on “quick-pay” mortgages are lower and allow buyers and home refinancers to cut their loan term in half while saving thousands in finance charges.

Q. We are planning to buy a new home, so we have followed your advice by checking the rates and terms offered by several banks and mortgage brokers.

Two of them suggested that we consider a 15-year loan instead of a 30-year, because the 15-year loan would have a lower fixed rate, and we would save a lot of money by paying off the mortgage in half the usual time. We think this sounds like a great idea, but what do you think?

A. I think that choosing a 15-year term over a 30-year repayment schedule is a good idea for many homebuyers and refinancers — provided they can comfortably afford the higher monthly payments that the shorter-term loan would entail.

Rates on 15-year mortgages are usually about one-half of a percentage point lower than those on their 30-year counterparts, in part because the shorter term cuts the lender’s risk, posed by future inflation, in half. The nationwide average rate on 15-year loans stood at about 4 percent at the start of May, according to a survey by HSH. com, while rates on 30-year mortgages had climbed to nearly 4.6 percent.

Choosing a 15-year mortgage allows borrowers to own their home debt-free in half the usual time and can slash more than 50 percent off the overall finance charges that a 30-year loan would involve. But many applicants won’t even inquire about such so-called quick-pay mortgages because they think their monthly payment would be twice as large as those required by a 30-year payback schedule. They are mistaken.

To illustrate, monthly payments for principal and interest would total $1,025 if you obtained a $200,000 mortgage at the recent 30-year fixed rate of 4.6 percent. Payments on a 15-year loan at the lower rate of about 4.0 percent would be $1,479, or $454 (44 percent) higher.

Sure, finding an extra $454 a month to choose the 15-year option would be difficult for a lot of borrowers. But if you could swing it, you’d not only own your home debt-free in half the time but would also save a boatload of interest: Finance charges over the course of the 15-year loan would total $66,288, compared with a much steeper $169,104 if you stretched the repayment over 30 years.

In other words, choosing the shorter-term loan over a 30-year schedule would leave you an extra $102,816 to supplement your retirement income, help to put your child or grandchild through college, or spend any other way you wish — all without worrying about making an additional 15 years of housing payments.

Despite the benefits that quick-pay loans can provide, they’re clearly not for everyone. Because monthly payments on the loan would be larger than they would be under a 30-year schedule, your income would have to be higher to qualify. You should shun the shorter-term loan if the higher payments would make it tough to pay other bills — or prevent you from keeping an amount equal to at least six months of your pay in a savings account to make ends meet if you get

laid off or encounter unexpected expenses in the future.

You also might want to pick the longer-term repayment plan if you’re a savvy investor who could use the cash that its lower payments would free up to make promising investments.

REAL ESTATE TRIVIA When leaders of the Federal Reserve Board recently hiked the rates that banks could charge other lenders for overnight borrowing, they also confirmed their plan to make two more quarter-point increases later in the year to quell inflation — the first coming as soon as their June meeting. There’s little question that mortgage rates will keep rising.

Q. Is the damage that was caused by the

recent tornadoes and hailstorms that hit several states covered by a typical homeowners insurance policy?

A. Yes. Damage or destruction caused by tornadoes or windstorms, as well as by hail, is covered by a standard homeowners insurance plan.

Q. If I create the type of basic living trust that you often recommend, could I leave my home to my kids but my other assets to my college alma mater?

A. Sure. Like a will, a trust allows you to leave some of your possessions to your offspring, others to a friend and still others to a college, charity or other group. But unlike a typical will, creating an inexpensive living trust will allow those heirs to avoid the costly and time-consuming probate process after you die.

ABOUT LIVING TRUSTS David Myers’ booklet “Straight Talk about Living Trusts” helps readers determine whether creating a living trust makes sense based on their individual circumstances.

For a copy of the booklet, send $4 and a self-addressed, stamped envelope to D. Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be donated to the American Red Cross. Send questions to David Myers, P.O. Box 4405, Culver City, CA 90231-2960, and we’ll try to respond in a future column.