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Demand for 15-year mortgages surges as record low rates continue

May 31, 2012|By E. Scott Reckard
  • A Denver home in escrow this March. Freddie Mac says more homeowners are opting for 15-year loans when they refinance because of record low rates.
A Denver home in escrow this March. Freddie Mac says more homeowners are… (David Zalubowski / Associated…)

This year's spate of record low mortgage rates have led borrowers to refinance into 15-year loans at a pace not seen in a decade.

Freddie Mac's long-running survey of what lenders are offering to solid borrowers showed the traditional 30-year fixed-rate loan averaging 3.75% this week, down from 3.78% last week and the fifth straight week of record lows.

More eye-catching was the average offering rate for a 15-year fixed loan, which dropped from 3.04% to 2.97% -- the first sub-3% reading in the nearly 21 years that Freddie has tracked that type of loan.

Homeowners refinancing mortgages often debate the merits of 15-year or 20-year loans, options that  hasten their payoff date but require bigger monthly payments than a standard 30-year mortgage.

By Freddie Mac's count, 31% of refinancing borrowers have opted for the shorter-term loans this year, the most since 2002. Back then, the typical rate for a 15-year loan ratcheted down over the course of the year from about 6.5% to less than 5.5%, prompting 35% of refinancing homeowners to choose the shorter-term loan.

The type of borrowers in both cases was the same, according to Freddie Mac economist Frank Nothaft -- people in their 40s and 50s whose incomes have risen enough that they can spend hundreds of dollars more each month in order to pay off more principal.

"It costs them more, but they're looking to own their homes free and clear when they retire,"  Nothaft said.

At this week's average rates in the Freddie Mac survey, the monthly principal and interest payment on a 30-year fixed loan of $315,000 would be $1458.81, compared to $2,170.79 for a 15-year loan.

The Freddie Mac surveys assume that borrowers pay about 0.75% of the loan amount to the lender in fees and discount points. Solid borrowers who shop around often find slightly better rates, and homeowners also can lower the rate by paying additional discount points.

The survey does not include third-party costs such as appraisals and title insurance.

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