Homeowners Move Away From 30-Year Mortgages
Many homeowners who are refinancing their mortgages have been abandoning 30-year fixed-rate loans for 15-year and 20-year loans.
According to the Freddie Mac Quarterly Product Transition Report, 37% of those who refinanced a mortgage in the second quarter picked a 15-year or 20-year plan to replace their 30-year fixed-rate obligation. This was the highest number since the third quarter of 2003, when the U.S. housing boom was getting underway.
"Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the second quarter," Frank Nothaft, Freddie Mac vice president and chief economist, said in a press release. "For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term."
Fixed-rate loans accounted for 95% of refinanced loans during the quarter, according to the report.
Sponsored Links
Why 30-Year Loans are Less Fashionable Now
The lowest interest rates on record may have encouraged people to reduce their terms. People may not want the weight of a mortgage over their heads for three decades. Some also might now believe it will take less than 30 years for them to be able to sell their homes if they want to, which -- until recently, with the collapsed housing market -- seemed like less than a sure bet. Why sell a house with a mortgage when eventually it can be sold "free and clear"?
Search Millions of Home Listings
View photos of homes for sale and apartments for rent on AOL Real Estate
See homes for sale
See rental listings
Check out the latest real estate news
The choice to shorten a mortgage term may have offsetting impacts. A homeowner with a new mortgage of 15-years may save tens of thousands of dollars in interest over the course of the loan. The mortgage holder may also get much less of a tax deduction over the period they hold their loans. On the other hand, people may also feel that if they have little or no home equity, a 30-year obligation to pay for a home is a poor use of funds.
While economists speculate about why people choose among 15-year, 20-year, or 30-year mortgages, one thing is certain. The decisions are mainly being made by those who are refinancing, not buying. Far fewer mortgages are being used to buy new homes. Virtually every piece of housing data points to that.
