The 15-year rate switch

A new mortgage offers borrowers a single rate change, 15 years into a 30-year loan; savings are the draw, but beware of rising rates down the road.

By MSN Partner May 30, 2014 9:04AM

Image: Miniature home on sheet of percent signs © Comstock, Getty ImagesBy Daniel J. Goldstein, The Wall Street Journal


The WSJMortgage borrowers usually must decide between low rates or a long term. But one lender says you can have both.


Pentagon Federal Credit Union, the Alexandria, Va.-based credit union known as PenFed, has rolled out a 30-year amortizing mortgage that changes its rate just once, 15 years into the term of the 30-year loan. The credit union will be writing loans with the 15/15-adjustable rate mortgage up to $2 million.


PenFed says the product, launched in February, is designed to appeal to borrowers who are typically looking to refinance or purchase a second home, says Debbie Ames Naylor, executive vice president of mortgages at the federal credit union.


While the interest rate for PenFed's 15/15 ARM is fixed for the first 15 years, the monthly payment is still calculated over a 30-year amortization schedule, Ms. Naylor said. The loan rate change after the first 15 years is capped at a maximum of 6 percentage points on top of the original rate; so that a loan that is at 3.75% for the first 15 years can't rise any higher than 9.75%.

For a $1 million jumbo loan with the 15/15 ARM, the monthly principal-and-interest payment would be $4,560 at PenFed's recent rate of 3.625%, compared with a 30-year fixed loan for the same amount with a rate of 4.25% and a payment of $4,919. The interest savings on the first 15 years using the 15/15 ARM would be more than $86,000, PenFed says. "We're trying to give a lot of stability and value back to the borrowers," Ms. Naylor said.


Jeanine Hawk and her husband, Michael, refinanced their San Francisco home this year with a PenFed 15/15 mortgage. They closed the 3.85% jumbo loan after reading about it in a local newspaper. "It seemed like the right compromise for us," said Ms. Hawk, 54, who is completing her doctorate at San Francisco State University. Her 61-year-old husband works at the League of Conservation Voters in Oakland, Calif. "We're planning for our retirement and we wanted to be certain about our income stream," she said.


WSJ graphicSo far, the lender says it has received about 600 applications for 15/15 loans. It has closed 100, split almost evenly between purchases and refinances. About 30% of the closed loans were jumbos. (Jumbo loans are those above $417,000 in most markets, and more than $625,500 in high-price markets such as New York and San Francisco.)


The 15/15 mortgage isn't really new, said Fowler Williams, president of Crescent Mortgage in Atlanta, a mortgage lender that partners with community banks and credit unions to provide mortgages. Mr. Williams said that banks and other institutions have offered products with a "two-step" ARM, when the rate just flips one time, but typically the first rate change comes at either seven or 10 years, not at 15 years.


Credit unions like PenFed have the advantage of paying no federal income tax because they're not-for-profits—savings that they can pass onto their members. In addition, credit-union borrowers are sometimes exempt from certain state-level taxes involving mortgages, according to Mr. Williams of Crescent Mortgage.


Unlike other credit unions in today's market, PenFed is lending its own mortgage money, says Rob Chrisman, a mortgage banker in San Rafael, Calif., who runs his own mortgage blog. In 2013, PenFed wrote $4.8 billion in first-mortgage originations, up from $2 billion in 2008, according to data from the National Association of Federal Credit Unions. PenFed is now the second-largest credit union, behind Navy Federal Credit Union of Vienna, Va.


Mr. Chrisman says that the Dodd-Frank financial-reform law has squeezed smaller credit unions that can't afford large compliance and underwriting departments. "Most credit unions are happy to pass through the mortgage headaches to the secondary market," Mr. Chrisman said. "They just don't want the operational nightmare."


While locking in a long-term rate is attractive, there can be downsides in an environment where rates might be low now, but could jump later. "It's a calculated risk," said Mr. Chrisman.


But trying to model such an interest rate jump is difficult because interest rates have been in a mostly downward trend since rates peaked in July 1981.


Most consumers would refinance if rates started to rise over an extended period, said Mr. Williams, but if they don't "they might have a bad case of sticker shock."


Here are some issues to consider for jumbo-loan customers of credit unions.

  • Note restrictions: Credit unions have membership rules in their charter and not everyone can join every credit union. Restrictions may be based on geography, an applicant's employer or other factors.  
  • Beyond rates: As with any mortgage application, borrowers should also consider other factors such as out-of-pocket costs for origination and settlement. 
  • Think ahead: Look for several options from several lenders and make sure you ask a lot of questions. Some credit unions may keep their loans on their books while others may sell the loan, meaning you'll be dealing with a different loan servicer than the credit union.

More from The Wall Street Journal


Jul 12, 2014 10:41AM
I wish they offered 3-year fixed, 5-year fixed, and 7-year fixed mortgages.  I have a 10-year fixed mortgage, but only because shorter fixed rates weren't available.
Jul 12, 2014 10:01AM
I would never do an ARM in this economy.  That is what got millions of American's in hot water in the last recession.  We could end up in another recession at any time.  We are so tied to the troubling World economy, and the European Union is still on the brink of bankruptcy.  If they go down so will we, and the vise versa.  If I have learned anything from the last recession, it was to keep my nut small and live within my means. NO ARMS!  The are stupid.  You can pay any house off early, by making payments towards the equity...
Jul 12, 2014 9:22AM
Finance your home for 30 years, but pay it off at a 15 year rate. Put the extra part of your payment to pay off the principal, not the interest, this will save you a ton of interest in the long run. The reason for the 30 year loan, is if you get into financial trouble, you simply reduce your payments to the 30 year refinancing necessary.
Jul 12, 2014 8:19AM
I wont be doing this because I cant even afford a house I cant even afford a dump or a low income house
Jul 12, 2014 5:12AM

Cars now can be financed for , I beleive, 96 months.  


What it shows is that wages are so stagnant that in order for many to buy cars and houses they have to get creative, offer long term loans.


This is a temporary fix and eventually, they whole thing will crash.  Same for health care and home insurance.  You can only expand deductibles so far.   High deductibles and co pay still  put many in a bind.


US moving toward being a third world country and in many respects already is considered second world in education, health care, income, longevity, hours worked, etc.

Jul 12, 2014 2:54AM
They know they must change mortgages because the old structure no longer works with 200K homes BUT they are trying to hold onto the interest cash cow and it will not work. They must offer a loan with less interest pain or housing prices must fall back to 1990 prices.
Soon builders will offer "0%" on homes you buy from them just like they had to do with vehicles when prices exceeded paychecks. 

Jul 12, 2014 2:33AM
This is an interesting loan, but you're still paying for 3 decades.  Better off to suck it up and get a regular 15-yr fixed, or even shorter term if you can swing it.  If you can't afford the payments on a 15-yr fixed, you are probably spending too much on a house.
Jul 11, 2014 11:40PM
No thanks!  As it is, my 10-year mortgage is too damned long.
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