Refinance or not to Refinance

by Jamie Namock on July 12, 2012

Don’t restart the 30-year clock on a refinance

Rates on 10- and 15-year mortgages now in the 2s

By Tom Kelly
Inman News®

For a guy who once begged for a home loan under 12 percent, I could not believe my ears.

“For people with decent credit and some equity, we’re quoting fixed-rate loans in the twos.”

The conversation took place on a city bus, between two friends headed downtown for lunch. Local lenders soon verified the information. Better yet, family friends validated it by sharing their second-home example.

Home mortgages in the twos? Uncharted territory. While 30-year, fixed-rate loans have been under 4 percent at several times this year, I underestimated the possibility of a lower rate with a shorter term. As loan terms are reduced, so is the lender’s risk in extending credit, hence a lower interest rate.

To confirm what I heard on the bus, I made a few calls to lenders.

Mark Palmer, vice president of loan production for Seattle Mortgage, said a growing number of his refinance customers have requested 15-year and 10-year loans and a few have made inquiries on new-purchase loans. Rates and fees are the same for both principal residences and second homes.

“Consumers are much more savvy about saving money,” Palmer said. “They don’t want to restart the 30-year clock on a mortgage, especially if they have been in the home for a while. When they see they can get a 10-year loan in the twos, they are willing to listen to what’s possible.”

It used to be that borrowers tended to take the lowest interest rate available, knowing they would probably sell and move on to a bigger and better home. Now, with double-digit appreciation no longer a given, they are staying put longer and viewing the home more as a comfortable shelter rather than an investment gamble.

Recent data supports the growing pay-it-off mindset. A recent Freddie Mac report showed that 31 percent of recent refinancers shortened their loan terms, which is the second-highest level since 2002. The Mortgage Bankers Association reported that applications for 15-year loans were at their highest point of the year.

“Historically low rates and an average of three-quarters of a percentage point difference between 30- and 15-year mortgage fixed-rate mortgages are important drivers for moving to a shorter term,” said Frank Nothaft, Freddie Mac’s chief economist.

(When we went to press, 15-year fixed-rate mortgages averaged 2.89 percent, according to Freddie Mac’s weekly mortgage market survey. The 30-year fixed-rate mortgage averaged 3.62 percent. Both rates were all-time lows.)

Lenders say many consumers are still unaware of how low rates have dropped in relation to their present interest rate. Others simply don’t want to go through the hassle of refinancing even though they might save a few bucks each month.

Unless you are haunted by an immediate want or need for a large sum of money — for example, for medical expenses or a major investment — the decision to refinance should be based on how long you will be in your house. If you are going to be in the house a short time, the fees and other costs may outweigh even the record-low interest rate.

If you are reluctant to refinance because of your unknown time in the home, there are ways of reducing your loan principal yourself without refinancing. You can always pay more each month toward the principal.

Another option gaining popularity is to take the money you would pay for refinance fees (plus maybe other cash you’ve saved) and plunk it down on the principal portion of the loan. The money would pay off the original loan faster and save interest along the way. It’s not a bad idea considering you could borrow the money back via a lower-fee (but higher rate) home-equity loan.

One family that took advantage of a fixed-rate loan in the twos were friends who restructured the ownership of their lake cabin. After a remodel that included a bunkhouse and an enhanced living room and kitchen, the parents and their three adult children all “went on the line” for a new mortgage.

In essence, four parties with equal shares in the property signed for the mortgage. All parties pay a monthly amount into a fund that takes care of the mortgage, property taxes, insurance and maintenance. The mortgage, a 10-year loan at 2.65 percent, is automatically deducted each month from the fund.

“We could have done it with a higher payment and longer term,” the father said. “But now it will be paid off when the kids are still relatively young. While we didn’t really want to get a mortgage, having a loan in the twos doesn’t feel so bad.”

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