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Current interest rates look like you can get a 15 yr mortgage at 3.25% and a 30 yr mortgage at 3.99%. This translates into paying $90,363.30 more for the 30 yr mortgage.

Why do banks charge a significantly lesser rate for a 15 yr. fixed mortgage than a 30yr. (though they know it will not earn them the same amount of money)?

  • The complete answer to your question is complicated, and involves monetary policy and interest rates at the federal level, yield curves, reinvestment of interest payments, and competition among banks. – D Stanley May 11 '17 at 16:56
  • You can look at it this way. A lender can expect a certain number of mortgages to default or be paid off early, so longer-term mortgages have higher rates to collect more interest up front, before the mortgage terminates. – chepner Jun 9 '17 at 21:19
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Risk.

A shorter-term mortgage is less risky than a long-term mortgage - in this case there's half the chance of something bad happening because there's half the time allotted (15 vs 30 years). Bad things include you going bankrupt, massive inflation, or your home being destroyed in a meteor impact that your insurer won't cover.

They entice consumers to these less risky mortgages by offering a lower interest rate.

  • For a second I thought everyone in this neck of the woods lost their humor. I understand the idea behind risk, but why not charge the equal amount of interest and sell it as a lump-sum difference? You'd mitigate the loss by 13,000. – Liam May 11 '17 at 3:38
  • "sell it as a lump-sum difference" Sell what as a lump-sum and to who? – Necoras May 11 '17 at 15:52
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    I think @Liam means, "sell" (as in market) the shorter mortgage to the consumer as "hey, look at all the money you will be saving". To which I would say, then why don't I minimize my risk, get the 30 year and try to pay it off like a 15. Then if something happens (lose my job, etc), I can lower my payments for a time. – mikeazo May 11 '17 at 16:21
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Why do banks charge a significantly lesser rate for a 15 yr. fixed mortgage than a 30yr. (though they know it will not earn them the same amount of money)?

A simplistic model of where banks get the money to lend to borrowers is that they "borrow" money from investors that want to earn a return on the money that they provide. The actual mechanics of that process are much more complicated, but the gist is that if those investors want to tie their money up for a longer period, they expect to get a higher return, thus 30-year mortgages require a higher interest rate than 15-year mortgages. In addition, the "usual" consensus in the market is that interest rates will rise in the future, so interest rates for longer-term loans are higher

While it's true that the bank gets "more money" overall from a higher-rate mortgage, the fact that that additional money doesn't come until several years into the loan (and that money loses value over time due to inflation) makes a lower-rate 15 year mortgage roughly equivalent to a higher-rate 30-year mortgage.

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