The Best Gift to Give Yourself This Year


As the holiday shopping season winds down to its final day, many people have started to think about what they'd like to buy for themselves after the gift-giving is done. Yet while the gift I'm suggesting you grab for yourself may not be the most romantic idea in the world, it's certain to be a crowd-pleaser for the entire family a lot longer than most of the gifts you'll find advertised this time of year.

My suggestion: Take advantage of rock-bottom interest rates and get yourself a 15-year mortgage loan. Whether you're refinancing an existing loan or looking to take advantage of the low home prices that still dominate in most areas around the U.S., looking more closely at a 15-year mortgage can potentially save you hundreds of thousands of dollars in interest and dramatically shorten your path to the peace of mind that a fully paid-off home can provide.

Coming into vogue
Historically, 15-year mortgages haven't been all that popular. They usually don't offer that big of a discounted interest rate compared to 30-year mortgages, and because of their much shorter length, homeowners have to come up with much larger monthly payments with a 15-year mortgage.

But recently, use of 15-year mortgages has spiked. Nearly a sixth of all mortgages during the third quarter that banks sold to Freddie Mac were 15-year loans, compared to just 1 in 10 the previous year.

The move is likely due to a couple of unusual situations for homeowners. On one hand, 15-year mortgages carry substantially lower interest rates than 30-year mortgages right now -- nearly three-quarters of a percentage point less, with 15-years at 2.65% last week. At the same time, because refinancing has been extremely difficult for many homeowners over the past few years, those who are refinancing right now have generally been in their homes for quite a while, and refinancing to a 15-year avoids having them dramatically extend the repayment life of their loans. And in fact, because rates have fallen so far, many homeowners are finding that they can shorten their loan life while keeping payments roughly the same or even a bit lower.

Big savings for you
The benefits for homeowners who can afford to make the switch can be huge. Over the course of a typical 30-year loan of $400,000 at 3.5%, you'll pay more than $246,000 in interest. Use a 15-year mortgage at 2.75% instead, and you'll pay less than $89,000 -- a savings of more than $157,000.

Under that scenario, you'll have monthly payments of $2,700 rather than $1,800. But with all of that $900 going toward paying down principal, it's not as if that money's going out the window. Rather, it's building up your home equity at a much faster pace than most people with 30-year mortgages are used to seeing.

Good news for mortgage investors?
Of course, on the other side of the equation, the trend toward more 15-year mortgages has an impact on lending banks as well as the entities that invest in mortgages. For Wells Fargo and Bank of America , 15-year mortgages are a boon as they're still eligible for resale to Fannie Mae and Freddie Mac, and because they typically require better financial stability among borrowers, they have a built-in margin of safety that reduces the chance that bad loans will be pushed back to the banks. That also helps mortgage insurerMGIC Investment and its peers by reducing the risk that they'll have to pay out on mortgage insurance.

Home-loan investors like mortgage REITs can also benefit from 15-year mortgages, as they're arguably less likely to get refinanced and paid back early. That's good news for Annaly Capital , American Capital Agency , and other REITs that invest in agency-sold mortgage-backed securities, as it leads to a more predictable income stream and avoids their having to try to reinvest prepaid principal, often at lower rates under less favorable circumstances.

Why wait?
With the Federal Reserve having pushed mortgage rates down as far as they can go with its quantitative easing program focusing on mortgage securities, it's not all that likely that you'll get a better deal than what you're seeing today on mortgage rates. Locking in a 15-year mortgage may force you to readjust your cash flow, but the added monthly payments are actually just forced saving, and the interest savings are a gift that will keep on giving for years to come.

Among banks beaten down in the financial crisis, Wells Fargo's mortgage loan business held up better than most. Today, its stock trades at a premium to the rest of the industry, so is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

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