When you refinance your 30-year fixed rate mortgage, into which product will you refinance? If you're like a lot of U.S. homeowners, you'll choose a shorter-term loan.
30-year fixed rate mortgages are less popular these days.
Fewer Opt For 30-Year Fixed Rate Mortgage
According to Freddie Mac, as mortgage rates have dropped this year, so have loan terms.
Between April-June 2011, of all the Freddie Mac-to-Freddie Mac refinances, 37% of homeowners who started with a 30-year fixed transitioned into 15-year or 20-year fixed rate loans. It's the 30-year fixed fastest abandonment rate since 2003.
There's no surprise about why it's happening, either.
Last quarter, the gap between 30-year fixed rate mortgage rate and the rest of the loan market got wide. The spread between the 30-year fixed and 15-year fixed, for example, averaged 80 basis points.That's the widest gap in recorded history.
15-year mortgages are "on sale" and homeowners are taking advantage of it.
For budget-conscious homeowners, there are positives and negatives about changing from a 30-year fixed rate mortgage to something shorter, such as a 20-year fixed or 15-year fixed.
The most obvious positive is that with shorter terms come lower mortgage rates. 15-year fixed rate mortgages carry lower interest costs than comparable 20-year or 30-year fixed rate loans.
The big negative, though, is that with shorter terms come higher monthly payments. Because you're compressing the loan payback schedule into a smaller time frame, the paybacks are larger each month.
At today's rates, the payment on a 15-year fixed is 46% higher than a similar 30-year.
The good news, though, is that over the long-term, you'll save a ton of money. Assuming a $300,000 loan size at today's rates, homeowners using a 15-year fixed rate mortgage will save $155 thousand in interest costs.
Get A Mortgage Rate Quote For Your Loan
No matter what your current mortgage looks like, it's a good time to get a rate quote. Mortgage rates are low and closing costs can be waived. Make sure you ask your lender.