Bigger savings in shorter loans

WASHINGTON â€”  If you think you’ve refinanced yourself into your best possible financial position, think again. There still might be some big savings available, even if you’ve pushed your rate about as low as it can go.

By switching to a shorter term, you can trim years off your payments, own your home free and clear that much faster and cut your interest outlay by thousands. And best of all, you don’t have to start all over again.

Most homeowners know the payoff in interest savings is huge by jumping from a 30-year loan to a 15-year, but the monthly payments are somewhat higher. But what most folks don’t realize is that they can ease the pain somewhat by going from a 30- to 20-year term and still rack up some respectable numbers. Or, if you already have a 15-year loan, opting for a 10-year offers some handsome rewards as well.

Many lenders will make 10- and 20-year loans. “Lenders are being very accommodating right now,� says Doug Perry, first vice president of Countrywide Home Loans. “Practically any term is achievable.�

There’s nothing to indicate a clamoring for shorter-term loans, but evidence is mounting that savvy owners who already have taken themselves down to the bottom of the interest-rate cycle are now looking to get out of debt sooner.

During January and February, for example, Fannie Mae, which acts as a conduit between local lenders and investors worldwide, acquired and secured more 20-year mortgages than in all of last year.

And Perry said that, since the first of the year, Countrywide has seen a 25% jump in refinancings with terms of less than 15 years. “Term-reduction refinancings are very popular right now.�

Tony Marouchoc of the New England Pacific Mortgage Co. in Warwick, R.I., has done a dozen refinancings “down to 10-year terms� since October, and they weren’t all with small balances either. “They run the gamut. We did one for $44,000 and another for $173,000.�

None of this surprises Frank Nothaft, chief economist at Freddie Mac, another major supplier of mortgage money. “There’s certainly a clientele out there looking for product like that,� he said.

One ideal demographic for a term-reduction refinancing is an older borrower who’s paid down his current higher-rate mortgage, has a relatively small balance and wants to time the loan’s payoff to his retirement. He’d like to take advantage of today’s rates, which are some of the lowest in four decades, but he doesn’t want to start over. He’d like to finish up by the time he assumes a life of leisure.

Another candidate is anyone whose income has gone up enough to afford the higher payments that are part-and-parcel of shorter-term loans. Affordability is the key for this group because payments are definitely much larger when you pay off your balance more quickly. But there’s no magic in paying interest, even if it is tax-deductible. So if someone has the income to handle a bigger monthly nut, why not do it?

Let’s look at the savings that are available by downshifting a mortgage. Assuming a $150,000 balance at today’s rates, here’s the breakdown in five-year increments:

At 5.79%, the monthly payment for principal and interest on a 30-year amortization schedule would be $879. And over the life of the loan, you’d pay a total of $166,503 in interest.

If you refinanced to a 15-year payback schedule or opted for a 15-year loan in the first place, the rate would be 5.16% but the payment would jump to $1,198. However, your total interest cost would dive dramatically to just $65,930, for an overall savings of $100,573.

If you can’t afford to hand over an extra $319 a month, then consider a 20-year mortgage. At 5.65%, a 20-year loan isn’t priced that much better right now than a 30-year loan. But again, because the term is shorter, the payments are higher. In this case, the payment would be $1,045. That’s still $166 higher than the payment on a 30-year loan but $153 less than on a 15-year loan. The savings aren’t as dramatic either. But still, $65,804 isn’t exactly pocket change.

By switching your $150,000 balance to a 10-year term, the rate wouldn’t change because, according to Keith Gumbinger of HSH Services, a Butler, N.J., firm that tracks the market, most lenders price their 10-year loans as if they were 15s. But even so, you would bring your total interest outlay down to “only� $42,240.

Admittedly, this one’s a bit of a stretch because the monthly payment would jump to $1,602. But if your income has gone up sufficiently, and you’ve got the money, it’s an option that’s certainly worth entertaining.

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Lew Sichelman is a syndicated real estate columnist. He can be contacted via e-mail at LS[email protected]. Distributed by United Feature Syndicate.