- The Washington Times - Friday, December 18, 2009

Despite a recession, sinking property values and consumer belt-tightening, 15-year fixed-rate mortgages continue to be popular - primarily because the rates are incredibly low. Today’s column will be focused on 15-year fixed rates and for whom they may be appropriate.

Clearly, the biggest attraction of a 15-year loan is the low rate. Last week, I quoted a client who has a $350,000 mortgage at a rate of 4.5 percent with no points or closing costs. These 15-year fixed rates have not been this low in 40-plus years.

Allow me to share with you the details of my client’s situation to illustrate who might be most suited for this type of mortgage.

My client is currently on a 30-year fixed loan with a rate of 5.25 percent. His balance is about $350,000 and he pays $2,032 in principal and interest (P&I;) every month. He has 27 more years left on his loan term.

Refinancing to a 15-year loan at 4.5 percent with no closing costs would result in a new P&I; payment of $2,677 per month - an increase of $645. Is this something that my client should do? It depends.

First, he must decide whether the extra $645 per month is affordable. Will the extra obligation inhibit the borrower from paying other necessary expenses, such as college tuition?

Second, the borrower must be sure not to “rob Peter to pay Paul.” The borrower must ensure that the higher mortgage payment won’t prevent him from engaging in other important savings plans, such as making allowable contributions to tax-deferred savings accounts.

Third, the borrower must be comfortable with the increased payment in the event of an unforeseen negative financial development. If the borrower loses his job, will he be able to make the mortgage payments for a reasonable period of time with little or no income?

If my client is comfortable with these issues, the 15-year loan will save him a lot of money over the long term. While an extra $645 per month over 15 years equals an extra $116,100, the amount of debt reduced is much larger. Under the 15-year scenario, my client will own his property free and clear at the end of 15 years, shaving 12 years from his existing term.

If my client decides to keep his current loan, my calculator tells me that his mortgage balance will be about $217,000 in 15 years. So, my client pays out $116,000 in extra payments to eliminate $217,000 in debt - a savings of more than $100,000.

Before I get clobbered by all the financial wizards who might be reading this, it’s pretty important for me to point out that the additional $645 per month can be invested to earn a compounded return over the next 15 years if my client keeps his existing loan. In fact, with interest rates so low, it’s very possible that he could earn, over the long term, a yield that might exceed the mortgage rate of 4.5 percent. If that’s the case, using cash to pay down such cheap money may not be the wisest move.

A 15-year mortgage should be seen as a forced savings plan. Every $645 that is used to reduce debt is equal to saving $645. While it’s not for everyone, a 15-year program is terrific for those who are less disciplined savers and risk-averse investors.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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