15-Year vs. 30-Year Mortgages (Part 1): Fun with Pix and Historic Data

A few days ago I wrote about the difference between tax-deferred retirement accounts and tax-paid retirement accounts, and commented about how the difference between the two is akin to a choice between instant gratification (for TDAs) and delayed gratification (for TPAs).

So how about taking that same framework to mortgages?

And, when doing so, how 'bout in this Part 1 we take a look at FRED pictures and have a look at how to make 'em tell a story? And then how about in Part 2 we take a look at whether a 15-year mortgage might be a better fit for you than a 30-year mortgage?

Sound like a plan?

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It used to be that interest rates on 15-year mortgages were about half a percent lower than interest rates on comparable 30-year mortgages. And sometimes they were only a quarter of a percent lower.

In the past year that spread has been as high as 7/8ths of a percent (0.875%) and is now about 5/8ths (0.625%) (the stock market stopped using eighths and sixteenths and thirty-secondths years ago; the mortgage market has not yet done so).

Here is the pic, courtesy of Uncle FRED, using all the data FRED has, this particular cold morning in December 2012:


fredgraph 30-year and 15-year mortgage rates


Remember, the title shows the full name and code-name of the data sets included in the pic, while the legend shows the color-coding of the lines using the code-names.

Here 30-year mortgage rates show in blue and 15-year show in red.

Ah, you say, but the data set for the 15-year rates is much more recent in origin.

Ah, yes, I say in response, different sorts of mortgages have proliferated over the years and back in, say, the 60s, it was pretty much one-size fits all — a 30-year fully-amortizing mortgage.

Wonky aside. The word "amortizing" means that your monthly payment obligation on the mortgage stays constant throughout the life of the mortgage, and is equal to the exact amount necessary to pay off the mortgage in full after the entire period. Believe it or not, keeping the payment constant like that and then hitting the nail on the head at the end of the mortgage means that, every single month during the mortgage, a different portion of your monthly payment goes to pay off interest that accrued in the previous month, which in turn leaves a different chunk of your monthly payment that month that can go to pay down the mortgage debt you owe to the bank, with payments early in the life of the mortgage going almost entirely to paying off interest, and payments later in the the life of the mortgage going almost entirely to paying off the mortgage debt you owe to the bank.


And, yes, your eyes ain't lyin' when you see the horrendously high interest rates in the late 70s and early 80s, nor when they see that interest rates since then have been trending down down down down down.

So let's look at the data sets for the period only during which both data sets were up and running, OK? That'll give us a better look:


fredgraph 30-year and 15-year mortgage rates since 1991



What'd'ya see? Take some moments to look around in there.

One thing to notice is that the red and blue lines sometimes touch — once in the 1993-or-so range and maybe again in the 2008 or so range — but probably never cross. I say "probably" because pixels can only show so much detail. FRED, if I were to take the time, will serve up all the numbers that together compose those lines, and then put them into a nice, tidy Excel sheet of my choosing, at which point I could then see for-sure whether the lines ever crossed. But today is not the day for me to do that.

Most importantly, I can eyeball that the blue line of late seems to be a lot further above the red line than it has been in the past.

Let's have FRED show us what that looks like, shall we:


fredgraph 30-year minus 15-year mortgage interest rate spread


Now we have arrived at a truly helpful picture. I went into FRED and told it to subtract out the 15-year mortgage interest rate from the 30-year mortgage interest rate, for any given date, and to then draw the spread — in finance-speak, differences between interest rates are typically called spreads — for all the dates.

Interest rates on mortgages are tantamount to their price. Do you see why?

And right now it looks like banks really want us to take 15-year mortgages — or to at least give them a long hard look, eh? — because the banks have priced 15-year mortgages far more attractively than usual.

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15-year mortgage rates, then, look relatively sweet these days — not far off their very most luscious.

So should you consider a 15-year mortgage?

The answer to that question will have to wait until Part 2.

Hint and Foreshadowing: Are you more of a heart-driven person or a head-driven person? If you’re more head than heart, then the 15-year might be just the ticket.

Further Hint and Further Foreshadowing: Are you more of a low-monthly-payment sort of person or more of a least-expensive-mortgage-possible sort of person? If you’re more of the latter than the former, then, again, the 15-year beckons.

Update: Here is Part 2.

762 words (less than an eight-minute read sans links)


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