Liz Pulliam Weston: Refinancing option -- shorter mortgages

The Basics

Good time to shorten your mortgage?

Lower rates on 15-year mortgages are presenting an attractive option: Trading in 30-year loans for shorter versions.

By Liz Pulliam Weston
MSN Money

Falling interest rates gave Theresa and Bob Philby of Birdsboro, Pa., an unexpected gift: the ability to shorten their mortgage without substantially increasing their monthly payments.

The Philbys had been paying $970 a month on a 30-year, 6.15% loan that they took out eight years ago. Their new 15-year mortgage carries a 4.625% interest rate and a $990 monthly payment.

"My husband is 10 years away from retirement, and our main focus is to be completely debt-free, as well as continuing to invest in our retirement," said Theresa Philby, 50. "With the 15-year loan and paying extra (principal), we plan on the home being paid for by retirement."

As rates on 15-year loans continue to drop -- in August they fell below the 4% mark -- more borrowers are seizing the opportunity to trade in 30-year loans for shorter versions.

More than one-third of all refinancers this year have chosen loans shorter than 30 years, and one in four chose a 15-year loan, according to CoreLogic, which tracks mortgage statistics.

In 2007, only about 15% of borrowers chose shorter-term loans, and fewer than one in 10 opted for a 15-year loan.

Loans people chose when they refinanced:
Fixed-rate loan term2010*200920082007

10 years

3.59%

1.84%

1.59%

1.13%

15 years

26.00%

18.52%

16.25%

9.43%

20 years

6.79%

4.19%

4.10%

4.25%

30 years

63.59%

75.44%

77.68%

83.49%

40 years

0.02%

0.01%

0.37%

1.69%

*Through June. Source: CoreLogic.

These folks have their acts together

In one way, the trend is counterintuitive. Shorter loans mean bigger payments -- the monthly cost of a 15-year loan can be 45% higher than that for a 30-year loan -- and many people are trying to economize right now.

"Given how many are already stretched for financing, I'm surprised to see a larger-than-normal interest in 15-year loans," said Cameron Findlay, the chief economist for LendingTree.com. "During times of economic upheaval, people (usually) try to extend the amortization period and reduce their monthly cost."

Payments for a $185,000 mortgage:
Loan termInterest rateMonthly paymentTotal interest paid*

15 years

4.00%

$1,368

$61,316

20 years

4.25%

$1,145

$89,940

25 years

4.50%

$1,028

$123,487

30 years

4.60%

$948

$156,421

*If entire loan is paid (that is, if the house isn't refinanced or sold before the end of the loan term).

In addition, Findlay said, the gap in rates between 15- and 30-year loans has narrowed in recent months, which means you don't get as much of a break for shouldering a shorter loan.

Then again, lending standards have tightened to the point where most people getting refinanced are "high quality" borrowers, Findlay said, with decent credit scores, steady incomes, some equity in their homes and not too much debt.

The borrowers refinancing today, in other words, are the type who are more likely to have their financial acts together enough to swing 15-year loans.

Also, rates have fallen to the point where people who missed the past few opportunities to refinance at lower rates can now opt for shorter loans without busting their budgets. If you still have a loan around 6% and have paid down your loan for a few years, you may be able to make the switch without a big increase in monthly payouts.

Continued: Worth it for the nearly retired

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