The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages.
Trulia economist Ralph McLaughlin steps out of the fray of trying to predict how and how and what effect the Fed liftoff will have on mortgage rates and absorptions. Instead, he looks into U.S. markets that suggest where a 15-year-fixed mortgage may have advantages--based on slower appreciation rates and the consequent importance of gaining equity faster from principal paydowns--over 30-year mortgages.
McLaughlin's top line findings fascinate:
- With the median US household income, a 30-year mortgage allows homebuyers to purchase 46% more house, but a 15-year mortgage provides triple the paid equity in just 5 years.
- Homebuyers in areas where prices have a history of rising will benefit greatly from faster equity-building with a 15-year mortgage.
- Buyers in areas with historically slow growing to flat housing prices will benefit less from shorter-term mortgages and potentially more from the borrowing power of a 30-year loan.