Refinancing into shorter mortgages appears to grow more popular

Some community banks say 10-year mortgages, once an insignificant niche option, are accounting for increasingly large chunks of their business.

By Kenneth R. Harney LA TimesJune 14, 2013

WASHINGTON — The refinancing boom may be cooling down, but the move to shorter mortgages — especially 10-year loans among pre-retirees — appears to be accelerating.

Some community banks say 10-year mortgages, once an insignificant niche option, are accounting for increasingly large chunks of their business. For example, Rockville Bank in South Windsor, Conn., reports that 10-year loans represented a surprising one-fifth of its total residential mortgage originations in dollar terms last year.

Plus in a survey released this month, Freddie Mac, the giant federal mortgage investor, found that 28% of all refinancings in the first quarter of 2013 involved shortening of terms. Among refinancers with 30-year mortgages, nearly one-third switched to shorter-term replacement loans.

Though 15-year mortgages have been popular for years among homeowners who want to pay off their balances quickly, lenders say the 10-year loan — targeted directly at the demographic tsunami of baby boomers who are still employed but planning to retire in the coming decade — is on the upswing.

“There’s a lot of interest in this [10-year] product,” said Victoria Stumpf, a loan officer with Third Federal Savings and Loan in Cleveland.

Why the growing attraction to going short? Start with interest rates.

With an almost-certain increase in rates on the horizon when the Federal Reserve begins to taper its purchases of mortgage bonds and Treasury securities, fixed rates on 10-year loans remain enticingly low. According to MyBankTracker.com, which surveys 7,000 lenders nationwide on rates and terms, the average 10-year fixed-rate mortgage goes for 3% with a fifth of a point. (A point equals 1% of the loan amount.)

But many community banks and smaller lenders quote much lower than that. Rockville Bank’s current rate for a 10-year, whether for refinancing or a home purchase, is 2.375% with no points. Third Federal’s quote for a $200,000 10-year mortgage is 2.79% with a closing fee of $450.

For community lending institutions such as these around the country, 10-year loans tend to be portfolio investments. Rather than selling the mortgages to Freddie Mac, Fannie Mae or other investors, lenders retain them in-house. Partially as a result, rates can be lower. And since lenders who specialize in 10-year mortgages want to keep risks as low as possible on their in-house investments, they typically require borrowers to have solid credit histories and significant equity or down payments.

Picture this: You’re in your prime pre-retiree years — anywhere from the mid-50s to early 60s. You’ve got a good income, significant equity in your home, good credit scores and you want to refinance to a lower rate. Your home is worth $250,000 and you need a $150,000 loan that will leave you mortgage debt-free — or close to it — once you’re into retirement. You don’t want to risk potential interest rate spikes along the way, so adjustable-rate loans are out of the question.

How does a 10-year loan stack up? Consider this comparative scenario using current rates and terms for 30-year, 15-year and 10-year loans provided by Jeff Lipes, vice president for mortgages at Rockville Bank:

•Interest rates: The 10-year’s 2.375% rate is the lowest by far. The rate on the 30-year fixed is 3.99%; on a 15-year, it is 3.25%.

•Monthly payments. Here’s where the shorter term and faster payoff of principal available through the 10-year mortgage can be a budget issue for some borrowers. The monthly total for principal and interest on the 30-year loan is just $715. On the 15-year it’s $1,054. But on the 10-year it’s nearly double what you’d pay on the 30-year — $1,406. Though over the term of the loan you pay substantially less in total interest charges, on a monthly basis the 10-year requires the most out of pocket of the three.

Frank Nothaft, chief economist for Freddie Mac, says that as part of a retirement planning process designed to leave you with lower debts at a predetermined point, a 10-year mortgage “could be an ideal product,” provided you’ve got the resources to handle the higher monthly payments. Ditto for a 15-year loan.

Bottom line: If you’re looking ahead, want to lock in what may be once-in-a-lifetime low rates and like the idea of getting rid of all home-loan debt for your retirement years, check out the mortgage shortening trend. A 10-year just might be a fit.

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