Last week’s survey by Freddie Mac shows mortgage rates for the 15-year fixed mortgage averaged 2.97 percent – down from 3.04 a week earlier. The latest information also revealed that 15-year mortgage rates decreased below the three percent level for the first time in the survey’s history. Consequently, 33 percent of borrowers -- three out of ten mortgage refinances, choose mortgage terms of less than 30 years. Before the housing and mortgage markets peaked in 2006, most homeowners who refinanced their mortgages chose 30-year mortgage balances over 15-year and 20-year terms.
One mortgage brokerage executive stated borrowers now have a different approach to refinancing their mortgages. Instead of taking out as much home equity as possible over 30-year terms or longer, more homeowners prefer loan products with shorter amortization periods. This strategy fits with their efforts to coordinate mortgage payoffs with their retirement timelines.
Short-Term Mortgage Refinances Highest Since 2002
In 2006, mortgage refinances of 15-year and 20-year comprised just 10 percent of mortgage applications. In the first quarter of 2012, Freddie Mac states that over 70 percent of mortgage applications consist of mortgage refinances with short-term loans. Now, many borrowers want 15-year, 20-year or 10-year terms for their mortgage refinances. Some homeowners elect to put in cash to reduce their loan balances low enough to qualify for the lowest mortgage interest rates available.
Short-term mortgage refinance of 15-years and 20-years have increased to its largest percentage of mortgage applications since 2002, when 35 percent of borrowers selected mortgages with short-terms and interest rates an average of 0.50 percentage points lower than the average 30-year rate.
Benefits of Short-Term Mortgages
One of the decision borrowers must make concerns whether to choose 15-year or 20-year mortgages over 30-year mortgage terms. Short-term mortgages help borrowers build up home equity faster and pay-off mortgages faster. Although some borrowers will need the financial resources to make higher monthly mortgage payments, other borrowers might end up decreasing their monthly mortgage payments depending on their personal circumstances.
For example, a borrower refinancing a $250,000 mortgage, at 3.75 percent over 30-years will have monthly principal and interest payments of $1158, and pay $166,804 in interest over the life of the loan. In contrast, refinancing the same $250,000 mortgage, at an interest rate of 3.03 percent over a 15-year term, results in a monthly payment of $1731. Interest payments will total of $61,411 over the life of the loan.
MBA Raises Mortgage Refinance Estimation for 2012
Late last month, the MBA reported that it raised it estimates of mortgage origination applications by nearly $200 billion-- from 1.26 trillion in 2011 to $1.28 trillion in 2012. Most of the increased in MBA’s projection consist of mortgage refinances, which the Mortgage Bankers Association expects to increase to $870 billion-- close to 2011 levels. MBA lowered its predictions for purchase mortgage applications down from $412 billion to $409 billion.
MBA adjusted the number of mortgage refinances up by $188 billion compared to estimates released in April 2012. The organization simultaneously lowered projections for homebuyers’ applications by $6 billion because of lower home values and anemic home sales.
According to Mike Fratantoni, who serves as vice President of Research for MBA, economic concerns in Europe have created an environment that has driven interest rates down as more investors buy Treasuries –considered the world’s safest investments.
Mortgage interest rates follow the interest rates paid on Treasuries. In 2005, Treasuries paid a yield exceeding five percent. By 2011, the yield dropped to just over three percent. Currently, the yield on 10-year Treasury notes has decreased to 1.58 percent.
Fratantoni emphasize that MBAs predicated its mortgage refinance calculations on recent revisions to the Home Affordable Refinance Program (HARP 2.0) making a significant impact and helping many borrowers refinance their mortgages successfully. MBA anticipates $100 billion in HARP 2.0 mortgage refinances for this year and an additional $100 billion in mortgage refinances in 2013.
Any borrower planning on a mortgage refinance needs to consider other costs of refinancing, such as appraisal fees, title insurance and escrow charges. You should also investigate maximum loan-to-value ratios, mortgage insurance requirement (if applicable), cash reserve requirement and other expenses. Homeowners who shop around can often secure better interest rates or obtain a lower rate by paying discount points.
Use the MortgageRefinance.com mortgage calculator to compare rates and find the right product for your mortgage refinance. Always find out the “lock-in” period in which lenders guarantee mortgage interest rate and point quote. The lock-in period varies between mortgage lenders and may consist of 30, 45 or 60 days.