Many homeowners are refinancing their mortgages to shorter terms
Borrowers who can afford the higher payments, and who meet lenders' tougher requirements, often opt to replace their 30-year mortgages with shorter-term loans at near-record low rates.
Reporting from Washington—
Want to refinance into a seven-year fixed-rate mortgage at 2.99%? Or how about 10 or 15 years fixed in the mid-3% range?These may sound suspiciously like teaser quotes with tricks in the fine print, but they are in fact signs of an important shift underway among American homeowners: Not only have they been refinancing at a robust pace in recent weeks, but they're dialing down on the remaining number of years they plan to pay on their mortgages.
Among community banks and lending institutions that originate mortgages to retain for their own portfolios, the trend is toward even shorter maturities. Jeff Lipes, president of the Connecticut Mortgage Bankers Assn. and senior vice president of Family Choice Mortgage near Hartford, Conn., says some institutions are dangling fixed rates just under 3% to refinancers who want to compress their terms to as little as seven years and are willing to set up automatic payment withdrawal accounts.
"It can make a lot of sense if you can do it," he said — especially for baby boomers in their 50s who want to be mortgage-free by the time they hit retirement.
Obviously you'd need to have the income or financial reserves sufficient to pay the extra money each month. Plus you'd need to be able to qualify for a refi in the first place under today's toughened underwriting standards.
Paul Skeens, chief executive of Colonial Mortgage in Waldorf, Md., said shifting to shorter-term debt "is a great move" — he's refinancing his own home to a 10-year term right now — "but do you have the appraisal to support it? Do you have the credit scores you need?"
With short sales and bank foreclosures still a heavy drag on market values, getting an appraisal high enough for a refi "can be almost impossible in some areas," Skeens said.
For some low-cost refi programs, lenders want to see at least 25% equity in the house. Higher FICO credit score requirements by Fannie Mae and Freddie Mac are another big impediment; both companies reserve their best rates for borrowers with FICO scores of 740 and higher.
The shift to shorter-term loans is part of an even broader trend among consumers emerging from the scary moments of the recession and global financial crisis: de-leveraging, reducing long-term household debt burdens and getting out of adjustable-rate loans. According to Freddie Mac data, "cash-out" refinancings, where homeowners increase their mortgage debt by more than 5%, accounted for just 25% of refinancings in the latest quarter, compared with 80% and higher during the boom years.
In the first quarter of 2011, 84% of homeowners who refinanced hybrid adjustable-rate mortgages switched to fixed-rate replacement loans ranging from 15-year to 30-year terms, Nothaft says. Part of the reason, he believes, is that today's rock-bottom fixed rates — with conventional 15-year rates in the upper 3% range and 30-year loans averaging just above 4.6% — are exceptionally attractive.
Plus, Nothaft said, "there's a lot of chatter about the [Federal Reserve] pushing rates up" in the coming months, so many homeowners are checking out their options on locking in rates that may well be the best they will ever see. Freddie Mac's own forecasts put 30-year fixed rates at 5.25% by the final quarter of this year.
The takeaway here: Even if you've already got a low mortgage rate, consider going shorter term, lowering your rate even further and owning your home debt-free sooner.
Distributed by Washington Post Writers Group.
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