The steadfast 30-year fixed mortgage refinance loan may become part of history as more borrowers shift toward single digit terms at rock bottom rates. Homeowners are crunching the numbers to see if paying more each month will get them closer to owning their home outright.
Rates for a seven year-fixed product are hovering at 2.99% with 15 year-fixed mortgage loans at 3.80%. According to Rank Nothaft, Freddie Mac’s chief economist the move to a short term is, “a very strong trend.”
Freddie Mac’s latest quarterly survey results demonstrate a clear move from 30-year fixed mortgage loans to 15 or 20 year. One out of three borrowers refinanced their 30-year fixed mortgage loan with a 15 or 20 year.
While 15 or 20-year products may be most prevalent, some mortgage companies are attracting borrowers with even lower terms. Jeff Lipes, president of the Connecticut Mortgage Bankers Association says that some mortgage companies and community banks are offering rates under 3% for seven-year terms.
Are Shorter Terms for Everyone?
While getting out of debt faster and owning your home outright are two good reasons to consider a short-term refinance, refinancing to a 15 or even a seven-year term may not be for every homeowner. Lipes says that it makes sense for those who have been in their home for several years (baby boomers) and are looking toward retirement in the near future.
He illustrates how a short-term mortgage could work to your advantage. Your current situation:
- The homeowner has a mortgage balance of $150,000 on a 15 year-year fixed rate, refinanced loan at 5.5%
- The loan still has 13 years to go.
- Monthly principal with combined interest equates to $1,225
- Over the next 13 years (156 payments) the borrower should expect to pay the lender $191,100 before the note expires
What happens if you refinance for a shorter term with the current rates:
- Refinance the $150,000 to a seven-year fixed rate mortgage at 3%
- 84 payments remain at $1,982 a month--totaling $166,488 until the note expires
- Add $3,000 in closing costs for the refinance
- Grand total is $169.488--$21,612 savings and complete home ownership in half the amount of time
Before taking the leap to a short term mortgages, borrowers must be confident that they have the income or cash to cover the extra $757 a month---which may be too much for those in or on the verge of retirement. Another consideration is qualifying for a refinance in today’s tight lending standards.
Although short-term mortgage refinances may not be everyone’s cup of tea, those who with the capital and credit scores should seriously consider taking the leap.
In fact Paul Skeens, CEO of Colonial Mortgage believes that refinancing to a shorter mortgage to shave debt is a “great move” and is currently refinancing his own home to a 10-year term.”
He agrees that appraisals and credit scores are a huge hurdle for many borrowers. Many low-cost refinance programs require that the homeowner has at least 25% equity in the home and typically mandate a higher credit score--typically 740 or even higher.
However, Nothaft warns that, “there’s a lot of chatter about the [Federal Reserve] pushing rates up.” Even if you have already locked into a low mortgage rate, explore your options--you could lower your rate even more and crush a significant amount of debt.