Why Refinance? Shorter Mortgages

These days, millions of homeowners all across the country are looking for ways to reduce the costs they face when it comes to paying their mortgages. Many have sought refinances in the last few years, and their reasons for doing so seem to be changing.

Obviously, the point of refinancing a mortgage is to make monthly payments more affordable, largely by reducing the interest rate charged on the loan. But these days, many consumers are turning more often toward paying more cash at closing to slash their principal and, more recently, reducing the term of their mortgage, according to new data from the home loan-backing giant Freddie Mac. In fact, during the third quarter, 29 percent of borrowers who refinanced chose to reduce the term of their mortgage, compared with 3 percent who opted to increase it. The remaining 68 percent kept their loan terms the same.

Further, more than 95 percent of borrowers opted to take advantage of the current extremely low fixed-rate terms available on the mortgage market, the report said. That includes 82 percent of refinancers who previously had hybrid adjustable-rate mortgages, the highest share observed since the second quarter of 2010.

“Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about 0.7 percentage points lower during the third quarter,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, a shorter-term, fully amortizing loan reduces the loan balance faster and builds home equity sooner.”

In fact, the most recent data from the government-sponsored enterprise shows that fixed rates for 15-year mortgages hovered at an average of just 2.84 percent over the course of the third quarter, the report said. That’s compared with 3.55 percent for 30-year FRMs.

Meanwhile, with property values rising in many parts of the country, current homeowners may now be considering selling once again, a prospect many abandoned during and following the recession. These increasing prices also led to millions of borrowers who previously were underwater on their mortgages to become right side up again. Many experts believe that appreciation in this area will continue through at least the next few months.

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