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Low rates make 15-year mortgages feasible for many refinancers

Monthly payments are higher but those who can afford it welcome the peace of mind of knowing that their home will be paid off in half the time of a standard, 30-year loan.

September 17, 2010|By E. Scott Reckard, Los Angeles Times

Dave Richards wants to retire in 15 years — and he doesn't want to still be paying his mortgage when he starts taking it easy.

So last month the 43-year-old Thousand Oaks resident, taking advantage of record low interest rates, refinanced his 30-year mortgage with a 15-year loan.

"The payment is more per month, but I'm comfortable with that," said Richards, president of a Westlake Village company that arranges sales of small businesses. "It's worth it to be able to retire at 58 with a zero mortgage."

As homeowners rush to refinance their mortgages, an increasing number are opting for a 15-year term. They're not only moving up the date on which they'll own their property free and clear, but also benefiting from a lower rate than those available on 30-year loans.

This week the rates offered by lenders on 15-year fixed-rate loans averaged 3.82%, Freddie Mac reported Thursday. That was down slightly from 3.83% last week and the lowest in the 19 years that the mortgage finance giant has tracked such loans.

The average rate on 30-year fixed-rate loans was 4.37%, up a bit from its record low of 4.32% two weeks ago, according to Freddie Mac's weekly survey.

For many people, another reason to choose a 15-year term is that they've lost confidence in their other investments, such as stocks and bonds, said Stevenson Ranch mortgage banker Fred Arnold, who refinanced Richards' loan.

"If their retirement income and savings fall short, they at least can count on their mortgage being paid off earlier," he said.

Baby boomers nearing retirement, who may recall 16% mortgage rates when inflation peaked in the early 1980s, are especially drawn to the 15-year loans, said Brad Blackwell, national sales manager at Wells Fargo Home Mortgage.

"They're thinking … 'I like the fact that there's a '3' at the front of the interest rate,' " Blackwell said.

Of the mortgage applications received these days by Wells Fargo, 22% are for 15-year loans. That's up from 15% late last year. With home sales depressed, the vast majority of mortgages being taken out these days are replacing existing loans, not financing a home purchase.

The recent boom in refinancing follows an even larger surge in 2009 that began when rates for 30-year loans dipped below 5% in the spring.

These days, lenders say, many borrowers are also choosing to pay down their loan balances when they refinance.

Some people take that step, increasing their home equity, because they won't qualify for a mortgage otherwise. For others, a higher level of equity can mean a lower interest rate, especially if reducing the loan amount means not needing a "jumbo" mortgage. Jumbo loans carry higher rates because Fannie and Freddie won't buy them.

The jumbo cutoff, which varies by region, is $729,750 in Southern California.

According to Freddie Mac, 22% of homeowners who refinanced their mortgages in the second quarter lowered their principal balance by paying cash at the closing. That was up from 19% in the first quarter, and was the third-highest "cash-in" level since Freddie Mac began tracking it in 1985.

Marsha Lenyk, president of Award Mortgage in San Diego, said one of her refinancers recently brought $125,000 in cash to the table when he refinanced into a 15-year loan. Doing so meant he could pay off his home-equity credit line as well as the 30-year primary mortgage.

The borrower wanted to rid himself of the credit-line debt because it had a variable interest rate that he knew would eventually rise, she said.

scott.reckard@latimes.com

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