Short Term Mortgages Become Popular

Lenders are reporting lately that up to 28% of their refinance business involves shorter term mortgages.  Among people refinancing 30-year mortgages, nearly one-third switched to shorter term replacement loans.

 

Some community banks say they are surprised that 10-year mortgages, once an insignificant niche option, are accounting for increasingly large chunks of their business.

 

Though 15-year mortgages have been popular for years among homeowners who want to pay off their balances quickly, lenders say the 10-year loan — targeted directly at the demographic tsunami of baby boomers who are still employed but planning to retire in the coming decade — is on the upswing.

 

"There's a lot of interest in this [10-year] product," said Victoria Stumpf, a loan officer with Third Federal Savings and Loan in Cleveland.

 

Why the growing attraction to going short? Start with interest rates.  With an almost certain increase in rates on the horizon, the average 10-year fixed rate mortgage goes for 3% with a fifth of a point cost (point equals 1% of the loan amount).  Some community banks and smaller lenders quote even lower than that.

 

For community lending institutions such as these around the country, 10-year loans tend to be portfolio investments. Rather than selling the mortgages to Freddie Mac, Fannie Mae or other investors, lenders retain them in-house. Partially as a result, rates can be lower. And since lenders who specialize in 10-year mortgages want to keep risks as low as possible on their in-house investments, they typically require borrowers to have solid credit histories and significant equity or down payments.

 

•Monthly payments. Here's where the shorter term and faster payoff of principal available through the 10-year mortgage can be a budget issue for some borrowers. The monthly total for principal and interest on the 30-year loan is just $715. On the 15-year it's $1,054. But on the 10-year it's nearly double what you'd pay on the 30-year — $1,406. Though over the term of the loan you pay substantially less in total interest charges, on a monthly basis the 10-year requires the most out of pocket of the three.

 

The bottom line is that if you are looking ahead, can afford to pay the higher monthly payment, you can pay your home off completely in 10 years!  Imagine being owning your home outright in this relatively short period of time!

 

I recommend that you speak to your lender regarding a shorter mortgage period when purchasing your next home or applying for a refinance.  Knowledge is power and it could be the right choice for you.

 

Nancy Puder is a real estate broker in Arroyo Grande, CA.  You may contact her at Nancy@NancyPuder.com or (805)710-2415 She always enjoys hearing from you!