The average Californian accrues $1.8 million in mortgage debt over their lifetime, the highest in the nation, according to a new study by JG Wentworth.
Compare that with West Virginia where residents accrue $784,000 of lifetime mortgage debt, the lowest in the nation.
Let’s take a median priced Southern California at about $855,000. Let’s say the buyer puts down 25% or $213,750, giving them a mortgage balance of $641,250. If that’s financed on a 30-year fixed rate at 5.5%, the principal and interest payment is $3,641. If you finance the same loan on a 15-year fixed at 4.99% (you always get better pricing on a 15-year fixed compared with a 30-year fixed) the principal and interest payment would be $5,068.
On the 30-year mortgage, the homeowner would pay $1,746,792 over the life of the loan.
On the 15-year mortgage, the owner would pay $1,136,475.
That means the 15-year note holder saves $610,317 over the loan’s term.
And yet, fewer than 10% of borrowers take out 15-year, fixed-rate mortgages.
Why? I can’t speak for the rest of the nation, but California homes are so unaffordable for many that borrowers can barely squeak by on a 30-year mortgage.
Let’s dig into the fundamental pros and cons of a 15-year fixed mortgage for your future consideration.
Pros
The mortgage interest rate is always cheaper than a 30-year fixed period, from anywhere from one-quarter to one-half percent.
Owners have faster equity growth, as more of the payment is thrown at principal reduction.
There are also lower overall costs, and faster financial freedom, plus what I call forced savings.
The 15-year note can be seen as a relatively safe investment with predictable payments as opposed to investing in an unpredictable stock market.
Cons
House payments using a 15-year fixed are significantly higher.
For example, today a borrower will make a principal and interest payment of $5,927 on a 15-year, $750,000 mortgage at 4.99%. The 30-year payment is $4,258 on an interest rate of 5.5%. That’s $1,669 more in payment and almost 40% more as percentages go.
It’s also harder to qualify for a higher house payment.
That high mortgage payment reduces monthly cash flow, tying up more income that might otherwise be used for other investments.
Borrowers also see less tax return interest deductions as more of the payment goes to principal paydown.
Something else
Some clients stay with a 30-year fixed rate mortgage but ask me to send them an amortization table for, say, a 15-year payment plan. The common reason being is they have irregular income, typical of commission-based jobs.
Behavior discipline is key. Maybe the loan doesn’t exactly get paid off in 15 years, but it pays off a lot more quickly than the 30-year amortized mortgage.
This “paydown” model is a non-starter for those without good financial discipline as they just don’t stay focused on the task at hand.
One other idea is to pick your own amortization period as part of the mortgage contract. A borrower can choose anywhere from eight years all the way up to 30 years. You are generally rewarded with a lower interest rate on a 15-year term or less compared with a 16- to 30-year mortgage.
Freddie Mac rate news
The 30-year fixed rate averaged 5.99%, 3 basis points lower than last week. It was the first time the rate slipped below 6% since 2022. The 15-year fixed rate averaged 5.44%, 9 basis points higher than last week.
The Mortgage Bankers Association reported a .4% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $16 more than this week’spayment of $4,982.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.25%, a 15-year conventional at 4.99%, a 30-year conventional at 5.5%, a 15-year conventional high balance at 5.5% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 5.875% and a jumbo 30-year fixed at 5.75%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.125% with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
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