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Shorter mortgages gain popularity

People who can refinance often prefer a mortgage of less than 30 or even 20 years. It's part of a larger movement to get a grip on consumer debt.

By MSN Money Partner Sep 1, 2011 4:01PM

This post comes from Marilyn Lewis at MSN Money.


You've heard that homeowners are refinancing to take advantage of ultra-low mortgage interest rates. And now there's a new twist: Borrowers are increasingly refinancing into shorter-term mortgages.


"People want to pay their home down faster. They're taking shorter-term loans whenever possible," Quicken chief executive Bill Emerson tells USA Today.


Interest rates paid by consumers are staying at rock-bottom levels, averaging 4.22% for a 30-year fixed-rate mortgage (with an average 0.7 point paid). Borrowers paid 3.39% (with an average 0.6 point) on average for 15-year loans, according to Freddie Mac's Weekly Primary Mortgage Market Survey for Sept. 1.  


These low rates are encouraging homeowners to pay down their mortgages, USA Today columnist Sandra Block reports:

Quicken Loans recently launched Yourgage, a customized product that allows borrowers to select the term of their mortgage. The most popular term for Quicken borrowers? Eight years. The second most popular is 13 years.
"Mortgage-burning parties are back," says Bob Walters, chief economist for Quicken Loans.

At online lender LendingTree, demand for 15-year loans is up 30%, Block writes. Post continues after video.

Willing to pay more

Overall, from January through March, 34% of refinancing homeowners switched from 30-year loans to a 20- or 15-year mortgage, says the USA Today article. According to Freddie Mac, that's a seven-year record.


Today's convergence of very low interest rates and poor -- and unstable -- stock market returns makes a shorter mortgage a smart move for many people. But you'll usually end up with a higher mortgage payment.


"My payment might go up a little bit but I'd rather put more of my paycheck into the equity in my house than into my 401k or into the stock market," Debbie Siegel, president of Westchester Mortgage, told New England Cable News in this video report.


Siegel says younger homeowners continue to favor 30-year-fixed-rate loans; she sees older folks intent on paying their mortgages faster.


The refi payoff

For many, though, the requirements to refinance are too steep. USA Today estimates refinancing costs at about 3% to 6% of the principal amount. Also, you'll need -- at the minimum -- a 720 credit score and 20% equity in your home. (Estimate your credit score for free.)


"Market researcher CoreLogic estimates that 46% of homeowners with a mortgage have equity of 20% or less in their homes," says Block.


If you can swing it, though, you stand to save tens of thousands of dollars -- or more. New England Cable News runs the numbers:

For example, a $200,000 mortgage financed over 30 years at 4.5% will cost the borrower $164,000 interest over the life of the loan. And only 26% of the first payment goes toward the principal. Compare that to a 15-year fixed, which costs $75,000 in interest and 51% of the first payment goes toward the principal, but the payment is $516 more a month.

If you can't afford to increase your monthly mortgage payment, it's best to get payments as low as possible and pay extra when you can. (Should you refinance? Try MSN Money's calculator.)


Down with debt

The drive to pay down mortgages is part of a larger movement to shrink consumer debt in all categories, including credit card balances.


The St. Louis Post-Dispatch profiles a young couple, Chris and Dina Croy, who are digging out of debt. They've put their 4,000-square-foot home on the market to dump the expensive mortgage and rent a much smaller home.


"We're actually quite enjoying the experience of purging so much stuff," Chris Croy told the paper. "It looks like we'll cut 70% off our cost of living."


The Post-Dispatch says:

Consumers started the last decade about $5.2 trillion in debt. That rose to $12.5 trillion just before the 2008 financial crash. As of March, that was down to $11.5 trillion.

Here's a list of debt reduced, taken mostly from USA Today:

  • Consumer bankruptcies dropped 18% in July compared with last year.
  • Auto loan delinquencies haven't been this low since at least 1990, when TransUnion started counting.
  • Credit card delinquencies have dropped to a low last seen in 1996.
  • Consumer debt fell 5.8% in the first quarter this year -- to $4,679 per person.

"The personal savings rate, which measures how much disposable income Americans save, was 5% in July, nearly four times the level in 2005," says USA Today.


Not so fast

Much as we love a feel-good story, however, reality punches a couple holes in this one.


First, you'd think all this virtuous behavior would be a balm for the old spendthrift-wracked American economy. But it's not. Consumer spending greases the wheels of the marketplace, so shrinking spending means shrinking incomes for many of us.


"Consumers power 70% of the economy. Their newfound thrift is an economic ball and chain," says the Post-Dispatch.


Finally, there's this: Newly frugal consumers may not get to take credit, after all.


North Carolina State University economist Mike Walden (among others) says most of the massive reduction in consumer and mortgage debt is due not to consumer frugality but mostly to foreclosures and bankruptcies.


In fact, households have taken on an additional $600 billion in debt. Walden nevertheless gives consumer a tip of the hat: "… it was a very minor increase in debt -- about 0.5% annually, whereas prior to the recession households were adding to their debt at the annual rate of about 6%."


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