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Lenders Offer Special Low Rate for 15 Year Term - 2009-08-09
We’ve all heard about the PITI formula: Principal, interest, taxes and insurance. These four items make up the monthly payment that most homeowners send in to their lender each month.

Principal repayment is the gradual reduction in the loan balance over the term of the loan. And interest can be thought of as the rent you pay for borrowing the money you used to purchase your house.

Because home loans are calculated with simple interest, the amount of interest charged declines each month as the principal balance of the loan is paid down.

Taxes are paid to the county or municipality collecting them, and lenders require that we maintain Insurance coverage on the house to protect them (and us) against loss due to fire or other casualty.

Of these four elements, the interest we spend over the life of the loan is typically the greatest expenditure we face, so whenever a borrower has an opportunity to significantly reduce that expense, it’s worth considering.

That opportunity may be at hand.

Recent comments by Federal Reserve Chairman Ben Bernanke indicated that the central bank believes inflation will not be a concern for some time. That was good news for mortgage markets, causing rates to drop slightly.

But here’s the best news for borrowers: for the first time in a long time, the differential between 30 and 15 year terms has become significant, rewarding the shorter term borrower with a rate of only 4.75 percent. In contrast, the typical borrower who chooses a similar loan with a 30 year term will have to pay a rate of 5.375 percent.

Both of these rates are for conforming fixed rate loans of $417,000 or less, and both these rates are excellent when compared with predominant rates over the past thirty-some years. But anytime you have the opportunity to lock down a home loan rate of 15 years at any rate under 5 percent, it’s a true bargain.

Here’s why.  On a loan of $100,000 under the 30 year rate, the monthly payment of principal and interest is much lower, at about $560 per month, but only about $112 goes toward reducing the loan balance, at least initially.

In contrast, the same loan amount with a 15 year term carries a hefty monthly payment of almost $778, but a whopping $382 of that amount is applied directly against principal in the first payment, and the amount goes up from there over the life of the loan.

My rule of thumb is to always seek to lock in a low rate for as long as possible - Clark Howard once choked when I told him I would take a 100 year fixed rate loan if I could find one - but when rates for 15 year loans get below 5 percent, well, that’s tempting for everyone.

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