WASHINGTON — Maybe it's time to discard more of the time-tested adages and bromides about financing a house. For instance, it may no longer be smart to get the biggest possible mortgage for the longest possible term of payoff. Instead of paying more interest to get maximum deductions for a long time, it may make more sense to skimp in order to increase monthly payments, and spread them over a shorter time.
"Today's home buyers are increasingly making a sensible decision to use a 15-year loan to save more than a hundred thousand dollars, in most cases, from the final cost of their homes," said Donald I. Hovde, member of the Federal Home Loan Bank Board here.
He added that the traditional 30-year, fixed-rate mortgage takes the smallest bite out of the monthly paycheck, but that same long-term loan also carries the burden of a slightly higher interest rate. "Interest is always lower on a shorter-term mortgage," explained the former president of the National Assn. of Realtors and the one-time No. 2 person in the Department of Housing and Urban Development.
Wall Street Darling
Long an unappreciated orphan of home financing, the 15-year mortgage has emerged in the past year as a $1.5-billion darling of Wall Street secondary-mortgage-market traders--and also the choice of more than 30,000 rate-conscious home buyers.
To simplify mortgage comparisons, the FHLBB staffer suggested the example of a couple needing a $100,000 mortgage to buy a house. Recently, the 30-year mortgage carried a rate of about 12 3/4%, whereas a 15-year mortgage was available at a rate of 12% or 1/2% less.
The difference in the interest payment for the same $100,000 loan would be only about $130 a month more for the 15-year loan at 12%. But, over the repayment life of the loan, payments would total $391,320 for the 30-year mortgage in contrast to only $219,060 for the 15-year loan. That's a saving of $172,260 and 15 fewer years of payments!
The interesting part of the typical example of mortgage financing is that the additional $130 a month is paid for only 15 years. By paying $1,217 a month for 15 years, instead of $1,087 a month for 30 years, the savings is truly monumental.
So much so that veteran Washington realtor Earl Farr commented that it is surprising it took Americans so long to discover what a financing bargain they have been missing.
Hovde, who now talks housing finance with national leaders every day of the week, is betting on a continuation of the trend to shorter-term mortgage financing. Greater use of 15-year mortgages also has prompted the Federal Home Loan Mortgage Corp. (Freddie Mac) to devise a special, 15-year participation certificate to sell the loans in the secondary market.
Hovde said the certificate represents undivided interests in the fixed-rate, level payment conventional mortgages.
Another report indicates that Wall Street mortgage traders and packagers are endorsing the shorter-term financing concept because these new certificates are rated above average in quality. The securities are available in minimum denominations of $25,000.
Since last summer, Wall Street demand for these mortgage investments has widened the downward spread to 50 basis points ( 1/2%) below the comparable yield for the 30-year loans at Freddie Mac. The introductory spread was only 25 basis points (%) less. "In turn," added the dollar-astute Hovde, "the warming scent of that half-percent spread has attracted more borrowers to the 15-year loan . . . and assured a steady diet of these new mortgage participation certificates for mortgage investors across the land."
On the matter of mortgage rates, veterans in housing finance are becoming a bit "antsy" at the prospect that long-term borrowing rates on homes may inch up slightly this spring. Rates dropped in February for the seventh consecutive month.
But now some canny housing people are noting a leveling of rates and some signs of slight increases. If the hot housing market for new and resale houses continues strong through April, as expected, the buyers who waited until May or June to firm up their financing may be wishing that they had firmed up their financing in March or April.