Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, October 3, 1993 TAG: 9310040270
SECTION: HOMES PAGE: B-1 EDITION: METRO
SOURCE: By JOHN D. McCLAIN ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Medium
He traded in his 30-year mortgage for a 15-year note.
Just seven years after they were introduced, 15-year fixed-rate mortgages are now the second-most-popular loans that Americans use to buy homes or refinance their mortgages.
"A lot of people choose them so they can plan on retirement, for the time their kids begin college, or for other expenses they expect to see in that time frame as opposed to 30 years," said Donna Callejon, senior vice president for single-family marketing at the Federal National Mortgage Association.
That was Murray's thinking. "I've got four kids," said the president of a real estate title insurance company.
"I thought that in 15 years, I've got to put them through college.
Murray paid off the 30-year, 6.5 percent adjustable-rate mortgage on his home in suburban Fairfax County and took out a 15-year mortgage at 7.5 percent.
Since Murray refinanced, rates for 15-year mortgages have dropped to about 6.5 percent and he's thinking of refinancing again.
Fifteen-year mortgages now represent more than a third of the overall home loan market as Americans seek to reduce interest payments, build home equity faster and pay off their debts before incurring new ones.
Callejon said the 30-year, fixed-rate mortgage is still the most popular type of home loan, a little more than half of the market. The balance includes 5- and 10-year loans and various other combinations including adjustable-rates like Murray had and so-called balloon mortgages.
Not only are people are taking out 15-year mortgages to buy their homes, many are using them to refinance current mortgages like Murray did. In a refinancing, the homeowner pays off an old mortgage by borrowing a new mortgage.
But not all will find themselves with higher monthly payments like Murray did. Some with higher mortgage rates than the 6.5 percent that Murray had before refinancing will find themselves with similar or even smaller payments.
"If a borrower had a 30-year mortgage at 10 percent and went to refinance today, they could get a 15-year loan at 6.5 percent and keep their payment about the same," Callejon explained. "Obviously that would cut the interest expense tremendously."
In fact, she said that moving from a 10 percent, 30-year mortgage to a 15-year loan with a 6.5 percent rate would save $140,000 over the life of a $100,000 mortgage, since the total interest payment would drop from about $200,000 to just $60,000.
James W. Christian, director of the Real Estate Center at Texas A&M University, said most people would give up some tax deduction because of the lower interest payments of a 15-year mortgage.
Because of changes in federal tax law in 1986, only interest on home mortgages can be deducted from a homeowner's income tax.
"But if it suits your circumstances in a declining interest rate environment, then you're not talking about a great deal of give-up," Christian said.
Not all people feel at ease with higher payments over a shorter length of time.
Stephen Powell, an accountant in Fairfax Station, said he refinanced his mortgage last month, but retained the 30-year term.
"I didn't want to get locked into a higher payment," he explained.
Still, Powell said he is voluntarily paying the monthly equivalent of a 15-year mortgage "so I can pay it off early" as long as circumstances permit.
So when should a homeowner consider refinancing a mortgage?
"The rule of thumb is that your current mortgage needs to be about 2 percentage points above the current interest rate," Christian said.
Also lenders say homeowners should consider how long it will take to recoup the costs of refinancing.
To determine the payback, a homeowner should divide refinancing expenses by monthly savings: For instance, if the costs total $3,000 and monthly savings run $300, the recoup time is 10 months.
by CNB