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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28Comments
10/01/2010 2:50 PM
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And yes I agree with you that rate matters.  Primerica says it doesn't but that is just so they can sell their high rates loans.  You're right about that.  My point is that they shouldn't refi to a 15.  Refi for a lower rate on their 30.
10/01/2010 2:48 PM
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This isn't the same approach primerica uses.  They tell you to accelerate all debt and pay off your home.  You should never pay off your home.  You should carry the largest interest only loan you can afford.  We are a cash poor country and one of the reasons is because we don't use our mortgages properly.  We listen to banks and they are the ones with all the money. If you don't understand why you should carry a large interest only loan then you need to read Missed Fortune by Doug Andrews.  It never makes sense financially to pay off your home.
10/01/2010 2:41 PM
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playsports-  This is the same approach a company by the name of Primerica uses across the country to sell high rate loans by saying interest rate "doesn't matter".  I can understand you're saying makes some sense if you're investing your money proplerly, most people will not be disciplined enough to do so. Each situation is different and they are looking to retire and lessen they're monthly bottom line at the time of retirement. You are right about the math though- The $970 reflects a loan amount of $160k and the $990 reflects a loan amount of approximatley $129k

10/01/2010 2:32 PM
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Missy151- Talk to a professional. Each scenario is different. It depends where you're at and where you're going?
10/01/2010 2:28 PM
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The Philby's shouldn't refinance.  They are getting rid of their best tax deduction and probably have all their money in tax deferred accounts.  Everyone should read a book called Missed Fortune to learn how to use their mortgage properly so they don't lose equity when the market drops.  Having a 30 year mortgage while saving the difference between payments of a 15 and 30 yr mortage in a safe investment will actually give you the ability to pay off your home even earlier plus keep you liquid (cash) in case real estate values drop. A 30 yr is the only mortgage anyone should ever have. This artilce is mathematically inacurrate.
10/01/2010 2:25 PM
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kiawe- Historically you have an execellent interest rate. While it's true that rates are lower, you need to talk to a professional to see if a refi makes sense. You need to get into detail, and not call and ask "what's your rate?".  While it's true rates are in the high 3's low 4's on 30 year terms, you have to be willing to pay your closing costs. I have locked 3 loans under 4% this week for customers with 15 year terms or less. The deals are out there, you just have to be willing to pay origination to get the best rate.  You have to understand, we're a business too. There is a lot of work that goes into financing and third parties (appraisers, title companies/attorneys,​ etc.) need to get paid as well. That's why closing cost are involved. While it's nice to get something for nothing, it's not the case. You can take a higher rate and not pay cost. You get one or the other. Before applying, pay your credit cards down to 1/3 of the balance to maximize your FICO (you have 800+ so you're ok) and be realistic about your homes value in this market. Even if you're not underwater, I'm willing to bet you don't have the same value as 5 years ago.

10/01/2010 2:09 PM
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Would someone please tell me where these remarkable refi deals are?  Every place I've investigated posts wonderful rates up front, but the rates only apply to a very limited range of products or situations.  Normal (15, 20 30 year) mortgages aren't in the mix.  Incidentally, I am NOT underwater on my mortgage and have 800+ credit score, but the mortgage professionals couldn't knock more than .75% off my 5.25% rate.  Banks don't want to talk to you unless they think they can make money off you -- read SUCKER.
10/01/2010 2:02 PM
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I had a mortgage on my last house which was financed for 15 years and after 7 I cashed in. Good work, Wall St. I got nothing back--'O'. nada...nothing. Not a penny. There guys in the Banking Industry are 'criminals' and the God they worship is GREED.
10/01/2010 1:41 PM
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Oh, how I wish we had 20% equity right now. The neighbor just refinanced and I am very jealous. We finally came to the point where replacing the seventy three year old windows via a loan from the 401(k) became a less expensive option than continuing to pay the energy costs for such an old energy hog.
10/01/2010 12:48 PM
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I'm with Lil LAM - if you don't owe BIG bucks or are underwater on your mortgage, the banks don't want to talk to you.  I would look at a 15 year refi, but since we are looking to sell/buy something else in the next couple of years, then it would be useless.  I'd rather put the extra into updating this place to get the most out of it. 
10/01/2010 12:46 PM
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QUESTION:

YOU STILL HAVE TO PAY CLOSING COST. wHAT IS YOUR RETURN?

IF YOU THINK YOU MAY SELL IN THE NEXT COUPLE OF YEARS WOULD YOU REFINANCE?

10/01/2010 12:31 PM
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take responsibility for yourself.  If you think the bank shouldn't have given you the loan then you should have known you couldn't afford it.  Owning a home is a privilege and not a right.  Be responsible for your own actions and stop blaming everyone else.

10/01/2010 12:10 PM
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I am underwater. The price of homes has dropped and I owe more than I could sell it for. Plus, I have an adjustable rate mortgage, and a second mortgage (fixed) for a smaller amount. Back when I got the loans about 5 years ago, I was barely making any money, just divorced, and I shouldn't of ever been given the loans! I had ot have two of them because one company wouldn't finance for the entire home. It's not even a great home, but back then the values were so high and that was the cheapest home I could get into. I have tried the Obama making home affordable program but my loan is not fannie mae or freddie mac. The adjustable rate mortgage has went up substantially even in this bad economy. I have decided to stop making payments due to the fact I don't make enough money to pay them. I am working like a dog to make the payments, skrimping and losing my health. I  have no enjoyment in life this way. I have an old car that barely works and can't afford decent food. I guess I will be homeless soon.
9/16/2010 12:39 PM
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If you have Microsoft Excel, you can use the Loan Amortization schedule to see how to convert your 30 year mortgage to a 15, 20 or 25 year mortgage by merely adjusting the additional principal to pay.

 

Open Excel. Select File/New. Click View and select Task Pane if it does not automatically pop up on the right side of your window. From the Task Pane, select Templates/On My Computer. A window will open on the left called Templates. Select Spreadsheet Solutions/Loan Amortization.

 

Fill in the blanks. By playing with the Loan Period in Years, you can see how much your total P&I will be each month, not to mention how much you can save in total interest over the life of the loan which becomes a huge incentive to pay that additional principal.  

 

Why get locked into a 15 year mortgage and the burden of a much higher payment? By paying additional principal according to the schedule, you can have a lower term and remain flexible to weather unexpected financial setbacks such as major car repairs or in my case, a 30% cut in salary.  

9/15/2010 7:28 PM
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Too much of our national wealth goes into debt financing for housing. Middle class welfare. This makes no sense. Tax policy us unfair.

This comment is from someone who owns 3 homes and received an $8,000 housing credit from Obama legally.

Home owners utilizing the income tax system legally screwing tax payers and renters. The renters overwhelming vote for Obama. What idiots!

I have always said high earners should vote for high taxing Democrats because of the targeted loop holes help us avoid taxes. Low earning people should vote for tax cutter Republicans as they can't hide their income, and at least the system would be fair.



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Re-financing was at no cost to my wife and I...We ahd been paying for 15 years and bank had promotion.  Also, our mortgage is with local bank that doesn't sell mortgages on to Fannie, Freddie or any other institution.  Local bank appreciates good customers.
9/12/2010 5:27 AM
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However,  you start out again with most of your payment going to interest--a disadvantage for many years--if you refi.  If you've had your mortgage for years, unless the new rate is a substantial reduction, you'd be better off simply keeping the favorable principle/interest split you've acquired through years of payments, and simply make extra principle curtailments. If you made 13 full mortgage pmts a year, for example, your 30yr loan would be paid off in about 22 yrs at ANY rate. Why lose ground on closing costs with most of the new pmt going to interest again? It might take years to get back to where you were.
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Nine years ago, we re-financed $100,000 mortgage to a 10 year mortgage. We received 5 years fixed at 5% and 5 years variable rate currently paying 3%.  Our house will be paid off in 9 months.
9/09/2010 3:47 PM
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I'm currently in the refi process. I can shorten my mortgage from 24yrs to 15yr for about $150.00 more a month. 9yrs is a long time and $150.00 more a month is nothing when you do not have credit cards. 

 

Also, the thousands I save I get to keep and invest in my own future, not line the pockets of the banks.

 

Remember,  100% of foreclosures were on mortgaged properties. (Dave Ramsey)

9/09/2010 2:10 PM
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Probable need to verify the best choice for this new deal about refinance 2010
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