The 15 year mortgage has become more popular since mortgage interest rates dropped.  An article in the Wall Street Journal gave some reasons why this is happening.

With the low mortgage interest rates, many homeowners are finding that a 15 year mortgage is more affordable than previously.  In addition, for those homeowners that have been in their house for 5-7 years, the leap to a 15 year mortgage isn’t as big of a stretch as it was then they bought their house a few years ago.

Should you consider a 15 year mortgage?

The Benefits of a 15 year fixed rate mortgage:

• Build equity in your home faster
• pay less interest
• forced savings account
• Benefit with low interest rate refinance without stretching loan term back to 30 years

The Cons:

• You have to make that higher payment each month
• A house is  a terrible place to store your wealth – better than spending, but worse than most any savings vehicle
• Opportunity cost – money used to pay down principal is money that can’t be used elsewhere
• Loss of flexibility – a future job loss or financial challenge could be catastrophic because of the higher required payment on the 15 year fixed mortgage

In some areas, a 15 year mortgage is a disaster for people – for example, someone who took out a 15 year fixed mortgage in Florida or Las Vegas in 2007 is now seeing that they send in a payment and the house price drops by more than the principal paid in.  How would it feel to send $1000 to your savings account and the next day have $0 left?  That is what many people experienced with 15 year mortgages in rapidly declining markets.

Which loan is best for you?

On the other hand, if you are in a stable housing market like Charlotte or Raleigh, North Carolina, the 15 year mortgage may not be so dangerous.  You will spend less on interest, build equity faster, and protect yourself from spending the money elsewhere – the forced discipline of this mortgage is helpful to some people.

If you have pretty good assurance that your income is going to be stable or increasing for the next several years, if you are already saving for retirement, have an emergency fund, and don’t carry other debts such as credit cards, student loans, or car loans, then you may be ready for the larger payment of the 15 year fixed mortgage.

If you have some credit card balances, don’t have several months living expenses already saved in an emergency fund, and aren’t putting away money for retirement or kid’s education, don’t get a 15 year mortgage – there are more important things to do with your money.

Before you decide to take on a 15 year mortgage, consider the best uses of your money, and make sure your new mortgage won’t prevent you from doing something more important.

Mortgage markets improved last week as foreign buyers of mortgage debt helped to push mortgage rates to a 4-week low. The strength of the Stock Market and higher commodity prices should have pushed mortgage interest rates higher, but the bond market refused to play by old rules.

It marked the 3rd consecutive week that rates improved, breathing extra life into this year’s ongoing Refi Boom.

Fixed-rate, conforming mortgage rates fell about 0.125 percent on the week. ARMs did about the same.

There wasn’t much data to move mortgage rates last week; investors worked mostly on momentum and trends. However, the Friday University of Michigan Consumer Sentiment survey release garnered some attention.

After worsening in August and September, consumer sentiment fell for the third straight month in October.  Analysts worry about what it could mean to the economy.  Holiday Shopping season is here and consumer spending fuels the economy.  If households hold the purse strings tight, our nation’s budding economic recovery may stall.

Consumer Sentiment

In a scenario like that, employment rates won’t rebound so fast, but rate shoppers might not mind.  Slower-than-expected economic growth tends to suppress mortgage rates, helping to improve home affordability overall.

This week, data comes back into focus.

October’s Retail Sales report came out on Monday.  The report was better than expected, until you take out the auto sales, with Cash 4 Clunkers still impacting that number.  Mortgage rates in Charlotte improved Monday, even as the stock market improved.

On Tuesday and Wednesday, look for PPI and CPI — two key inflation indices.  Inflation causes mortgage rates to rise so if either of these reports comes in hotter-than-expected, rates will almost certainly rise.

And, lastly, also on Wednesday, we’ll get the Housing Starts report for October.  Don’t expect the markets to move on this one, but keep an eye on the data anyway.  Housing markets remain crucial to economic recovery.

Despite rates hovering near recent lows, remember that markets change quickly.  A rate quote from the morning is rarely valid by the afternoon and, when rates rise, rates rise fast.  We are now seeing the low rates again we saw for a few hours on October 5th.  When rates turn around, they tend to shoot up, but fall slowly.  I think we are near the end of the slow fall.