Low Interest Rates Encourage Shorter Mortgages

As mortgage rates hover near record lows, a growing number of homeowners consider shorter-term loans to pay off their mortgages earlier and regain equity at a faster pace. Is this a smart move or risky game?

30 year fixed rate mortgage 3 month trend

The benchmark 30-year fixed-rate mortgage rose to 3.62% from 3.59%, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index stood at 4.38%; four weeks ago, it was 3.7%.

The benchmark 15-year fixed-rate mortgage rose to 2.91% from 2.88%. The benchmark 5/1 adjustable-rate mortgage rose to 2.72% from 2.68%.

Weekly National Mortgage Survey

Results of Bankrate.com's Oct. 17, 2012, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

The extremely low rates on 15-year loans represent a rare opportunity for refinancers who currently have a mortgage with an interest rate in the 5% or 6% range.

"With mortgage rates ultralow, the payment shock of a 15-year mortgage is muted," says Dan Green, a loan officer at Waterstone Mortgage in Cincinnati. "Homeowners see this -- and the chance to drive down long-term interest costs -- and they take it."

Even homeowners who are underwater are tempted by the idea of shaving 10 or 15 years off their mortgages. Nearly 18% of borrowers who refinanced in August under the Home Affordable Refinance Program chose 15- and 20-year mortgages over the traditional 30-year loans, according to a report released Oct. 16 by the Federal Housing Finance Agency.

HARP allows borrowers to refinance regardless of how underwater they are. HARP refinances represented about half of all refinances in states hard-hit by the foreclosure crisis, such as Nevada, Arizona and Florida, according to FHFA's latest report.

But a shorter-term loan isn't always a viable option for homeowners who owe more than their homes are worth, especially when the shorter term means higher monthly payments, says Brett Sinnott of CMG Mortgage Group in San Ramon, Calif.

"One of the big holdbacks is qualifying when the payment is higher," Sinnott says. "If you can afford it, great -- but a lot of (HARP borrowers) want to lower their monthly payments."

Is a Shorter-Term Loan for You?

Whether or not you are underwater on your mortgage, the decision to go with a shorter-term loan should be evaluated carefully, mortgage professionals say.

Shorter-term loans can save homeowners hundreds of dollars a month and thousands of dollars over the life of the loan. They are a useful tool to recoup some of the equity lost during the housing crash. But when a shorter-term loan means higher monthly payments, homeowners should revisit their finances and rethink their job stability.

"When in doubt, use the longer loan term," Green says. "You can always add more principal to your 30-year mortgage payment. You can't send less with your 15-year payment, however."

Not as Short but More Affordable

Another option for those who really want to get rid of their mortgages sooner is a 20-year mortgage, Sinnott says.

"The 20-year has been very popular," he says. "The payments are not as a high as the payments of 15-year but not as long as 30-year. You get the best of both worlds."