Affordable real estate and historically low mortgage rates have created a new, excellent buying opportunity for those considering the purchase of a new home or resale home in Denver or suburbs like Reunion. Want to make the numbers look even better over the loan term? Consider a shorter 15 or 10 year mortgage rather than the traditional 30 year mortgage and your equity will grow even quicker.
Current 30 year fixed mortgage rates are very attractive. Data released by Freddie Mac, a government sponsored enterprise that purchases home loans on the secondary market, shows that for the week ending June 21, 2012 average 30 year fixed mortgage rates were 3.66% with 0.7 points (a new all time record low.) For those clients whose scenarios represent the least risk to mortgage lenders, and therefore tend to be rewarded with the best pricing, rates can be even lower. On Wednesday, June 27th advertisers on the mortgage rate research website ForTheBestRate.com had posted 30 year fixed rates as low as 3.13% (3.33% APR, $1995 Fees, 1.415 Points, Lender: AimLoan.com) in the rate tables.
To anyone who has been following mortgage pricing for more than the past couple of months that number is pretty incredible. To someone who bought their first house in the mid 1980s and paid rates as high as 16% it is downright mind blowing. It translates to a monthly principal and interest payment of $744.13 on a $173,600 loan amount (using this example because it is the median sales price in Denver of about $217,000 after a twenty percent down payment.) But now consider what is possible with a shorter term loan. Advertised rates for a 15 year loan term (also on June 27th) went as low as 2.50% (2.83% APR, $1995 Fees, 1.141 Points, Lender: AimLoan.com) and for a 10 year loan they were down to 2.63% (2.83% APR, $0 Fees, 1.000 Points, Lender: Cornerstone Mortgage Group.) It’s a little counter-intuitive that the 10 year is priced higher than the 15 year loan on this day, as in general a shorter term means less risk and a better rate. It could be due to lower demand for 10 year notes on the secondary market, and is evidence that financial markets of all types don’t always behave exactly as we expect them to.
These 15 year fixed and 10 year fixed loan programs are not structured like an adjustable rate mortgage where the rate is fixed for an initial period of time and the payments are still spread out over 30 years; with these loans the rate cannot increase during the life of the loan, and the repayment schedule is condensed into 15 and 10 years respectively. This means that if you continue to pay as agreed, unless you sell the property or refinance you will own it free and clear in 10 or 15 years, depending on which program you choose.
Though the rates are generally lower for the shorter term mortgages the monthly payment will be higher, as the loan amount is divided into many fewer payments overall. Using the same loan amount in the example above the monthly payments would be as follows:
15 Year Mortgage at 2.50%: $1157.55
10 Year Mortgage at 2.63%: $1646.81
Paying an extra $413.42 or $902.68 a month might not sound like a great idea, or even be financially feasible for many borrowers, but consider the savings by the time you reach the final mortgage payment.
Total Amount Paid in the example scenarios:
30 Year Fixed Rate Loan: $267,886.80
15 Year Fixed Rate Loan: $208,359.00 (Savings of $59,527.80)
10 Year Fixed Rate Loan: $197,617.20 (Savings of $70,269.60)
These savings can make a primary residence purchase more affordable, and can also lead to a greater return on a real estate investment. High demand for Denver rentals and low cost financing opportunities make it a great time to consider the purchase of a rental property.
About the author:
Anna Platz is a home financing expert based in Wilmington, North Carolina. She works as the personal finance editor for ForTheBestRate.com, a consumer directed website focusing on mortgage rates, insurance, and finance.