More Than 25% of Refinancers Chose 15-Year Fixed Mortgages

August 30, 2010 No Comments »

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More than a quarter (26%) of those who refinanced between January and June chose a 15-year fixed-rate mortgage, according to CoreLogic data, digested by Marketwatch.

In 2009, 18.5 percent of homeowners who refinanced opted for a 15-year loan, nearly three times the 9.4 percent share in 2007.

Similar data from mortgage financier Freddie Mac found that 30 percent of borrowers who originally had 30-year fixed-rate mortgages went with 15-year or 20-year fixed-rate loans, the highest level in six years.

So why the sudden popularity of shorter-term fixed-rate loans?

Well, one explanation is that mortgage rates on 15-year mortgages are so low now that borrowers can handle the larger mortgage payment.

For example, a $200,000 loan at 4.5 percent on a 30-year fixed would be roughly $1,013, while a 15-year fixed at four percent would carry a payment of $1,479.

But consider the fact that the borrower may have held an interest rate of 6.5 percent on a 30-year fixed prior to the rate and term refinance, with a monthly payment of $1,264, and you can see why the larger payment isn’t so significant.

Sure, it’s another $200 or so per month, but if they can cut their mortgage term in half for that price, it’s pretty compelling.

Another theory is that those who are actually able to refinance are the most creditworthy borrowers, those without second mortgages, who have the necessary home equity and plan to pay their loans down further.

There’s also the mentality that mortgage rates are so low that why not go as low as you can go, by snagging a 15-year fixed instead if you can save another .25% or .50%.

Just note that while a 15-year fixed can save you a ton of money in interest, it comes with greater responsibility, and if times get tough, that larger payment could prove to be your downfall.

It’s possible to pay a mortgage down in half the time simply by making extra mortgage payments, while giving you the flexibility to decide what you want to do from month to month.

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