Is the 15-Year Mortgage the Best Way To Save in 2023?

It’s not an easy time to be a home buyer. The home affordability index has declined in recent months thanks to a combination of factors. Inflation and higher interest rates make it more difficult for people to justify moving. Consider these figures from Market Strategist Charlie Bilello:

2 years ago: 30-yr mortgage rate was 2.77% & median existing home price in the US was $304k.

Today: 30-yr mortgage rate is 6.15% & median existing home price is $367k.

Result: $13k increase in down payment (20% down) and 80% increase in monthly payment (from $995 to $1,788).

That means that today’s home buyers are looking at $1,788 per month to buy the same house that used to cost them $995 per month two years ago.

With all this turmoil, you’d think people would want longer mortgage terms to reduce monthly payments. Some home buyers have a different strategy in mind: the 15-year mortgage.

How a 15-year mortgage helps home buyers save money

Fox Business recently reported that “homebuyers who want to save the most on interest should consider a shorter term. Rates for a 15-year mortgage are half a point lower than rates for a 30-year mortgage.” In an environment where mortgage rates dramatically affect monthly payments, even saying half a percentage point less can start to look good.

The downside of this approach? Paying in 15 years will, of course, require a more substantial burden monthly payment for the borrower. But if you can afford a 15-year mortgage, selecting a shorter term than the 30-year can potentially mean higher short-term payments but a lower overall cost burden for acquiring the home.

Looking at the data from BankRate, here is a typical example of what you might expect from the two types of mortgages, even if you’re talking about the same property.

Let’s say that a borrower needs a loan for $300,000. Given a 6.5% interest rate on the 30-year term, and a 5.75% rate on the 15-year period (rates based on December 2022 data), these are the monthly mortgage payments a borrower might expect to pay:

• 30-year monthly mortgage cost: $1,896
• 15-year monthly mortgage cost: $2,491

That’s about $500 more per month for the 15-year mortgage. That may sound steep, particularly if those five hundred dollars put you over your budget.

But look at the big picture. After all, mortgages aren’t just about what you pay per month. They’re also about what you pay in total. And if you look at the total cost of the two mortgages, here’s what you end up with:

• 30-year total cost of mortgage: $682,633
• 15-year total cost of mortgage: $448,421

That’s a difference of $234,212 on the same house. The difference comes from the substantial accumulation of interest over the 30-year term. Not only was the initial interest rate higher, but the accumulation of that interest over a longer payment term produced dramatically different results for the home buyer.

This puts a tough choice on home buyers: short-term sacrifice (with a higher monthly payment) for long-term gain or long-term sacrifice (much higher payments overall) for a bit of relief on the monthly budget?

Is 2023 the year to get a 15-year mortgage?

Even if you’re securing a 6.5% interest rate on a 30-year mortgage, it can get much worse. As Fox Business pointed out, “Today’s mortgage interest rates are well below the highest annual average rate recorded by Freddie Mac — 16.63% in 1981.” That puts today’s mortgage rates in context. And while it can be worse, so can inflation.

If you follow the 15-year mortgage rates chart provided by Google, you’ll notice a similar pattern as you do in 30-year rates. To start the year, mortgage rates have been dipping—but with a recent upswing back to the historical mean. 15-year mortgage rates in mid-February 2023 still aren’t where they were at the beginning of the year when typical 15-year loan terms would see rates of about 6.25%.

That means anyone who does secure a 15-year mortgage right now would be taking advantage of a temporary dip. In context with previous years, rates on both 15-year and 30-year mortgages continue an overall downward trend ending in 2022.

No one has a crystal ball regarding mortgage rates, but it does help to watch the economy. The CPI report that came out in February 2023 reported inflation was a tick higher than it was in January, which suggests that the decline we’ve been seeing as of late may not last. Of course, inflation could cool off again in March.

As for 2023, the U.S. Federal Reserve often changes its base rates to correspond to inflationary pressures. That may mean that interest rate declines may not be coming any time soon.

All this data just highlights how difficult it is to predict where prices will head. And when inflation rises, mortgage rates often follow. Plus, inflation reduces a buyer’s overall purchase power.

Deciding on your loan terms

With interest rates potentially stuck in the 6-8% range for 2023, home buyers will need all the help they can get. Ultimately, what you can afford will depend on your budget and individual financial situation. But one way to give yourself a long-term discount and potentially save thousands is to elect the 15-year mortgage rather than the 30-year. It’s lower rates on average, which increases your savings in the long run. Use a mortgage calculator to see how the difference in loan terms could impact your wallet.