Stephanie Armour
USA Today
An advertisement for home loans is shown at an ATM at Bank of America in Menlo Park, Calif. By Paul Sakuma, AP
More homeowners are refinancing into shorter-term loans, saving a bundle by taking advantage of the lowest mortgage rates in decades.
Nearly a third of borrowers refinancing fixed 30-year loans in April through June picked loans with 15- or 20-year terms, according to mortgage finance giant Freddie Mac. It was the highest share since 2004.
The trend has been driven by near-weekly drops in rates all summer.
Average rates on fixed 15-year loans fell below 4% for the first time last week, dropping to 3.92%, according to Freddie Mac. A year ago, the average 15-year rate was 4.68%.
Meanwhile, the rates on fixed 30-year loans now average 4.44%, Freddie Mac found.
At today’s rates, a borrower with a 30-year loan at a 6.5% interest rate and a $200,000 principal balance could save some $70,000 in interest over the life of a shorter 20-year loan.
“It’s borrowers looking to build equity more quickly, and borrowers have generally been paying down their loans more quickly,” says Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage and consumer loan information.
Peter Iche, president of Carthage Federal Savings and Loan Association in Carthage, N.Y., says he’s seen an increase in people who are approaching retirement refinancing to shorter-term loans.
“They realize that they can afford a heavier payment,” he says. “They’re getting closer to retirement where they are willing to suck it up for a few years.”
Most of the customers trying to refinance to shorter-term loans usually qualify, he says. And with rates as low as they are now, “For the group of people that can afford to do it, it’s a good time to wrap things up.”
Many can’t, however.
With rates at record lows, a higher volume of refinancings would be expected, says Mark Zandi of Moody’s Analytics.com. But high unemployment and lost home equity is preventing many borrowers from doing so, he says.
Application volume for both home-purchase mortgages and refinancings has been tepid because many potential borrowers lack high enough credit scores, sufficient income or enough equity in their homes to qualify for new loans.
Borrowers’ monthly payments rise when they refinance into a shorter-term loan, so lenders generally require borrowers to have higher monthly incomes to get a 15-year mortgage than a 30-year.
In addition, because property values in many areas have fallen sharply the past three years, about a quarter of residential properties with mortgages are worth less than the loan balances.