The 15-year mortgage, which was the standard when the Federal Housing Administration created the first fully amortized mortgage loans in 1934, is making a comeback as it regains acceptance among lenders, investors and home buyers.
For lenders and investors who are fearful of making long-term, fixed-rate loans, the 15-year term is so attractive that such loans carry an interest rate at least one percentage point below that of 30-year loans. Borrowers, too, like the shorter term as well as the lower interest rate.
"A lot of people are going to take these mortgages because they like the idea of owning the house free and clear in 15 years," said Warren Matthews, senior economist with the Mortgage Bankers Association. He added that people feel more secure with a 15-year loan because "you build your equity faster. They also like the fixed rate because you know for a certainty what your monthly payment is going to be."
Last August, when the rate on FHA and Veterans Administration loans was still around 14 percent, Banco Mortgage Co. of Minneapolis began offering the first of the new 15-year mortgages with a fixed rate of 11 percent. Applications at Banco's offices around the country totaled $145 million within the first six weeks. The low rate meant that the holder of a 15-year, $60,000 mortgage paid $632.20 a month, $5.40 less than someone with a 30-year loan at 13.5 percent.
"The concept really came from the GEM Growing Equity Mortgage loan," said Roger Hile, Banco's vice president for marketing. "But our mortgage has the advantage of fixed payment over the term of the loan."
The GEM loan, as introduced by Merrill Lynch, Salomon Brothers and the Federal Home Loan Mortgage Corp. (Freddie Mac) last July, carries a fixed interest rate and is amortized over a 25-year period. However, because the monthly payment jumps 4 percent each year with the increase going entirely toward the principle, the loan is repaid within 15 years.
However, if a family can afford the higher initial payments, they are better off with a 15-year amortized loan, argues Thomas J. Parliment, who recently left a position as assistant director of economics for the U.S. League of Savings Institutions to join a private mortgage firm. "Equity accumulates more rapidly, and this mortgage culminates in a payment nearly one-fourth lower. A 15-year, amortized, fixed-payment mortgage is clearly superior to the GEM."
The Government National Mortgage Association (Ginnie Mae), which purchases mortgages and pools them to create mortgage-backed securities for sale to investors, waived its requirement of a minimum 20-year maturity for mortgages in its securities to enable Banco to pool its 15-year loans. A spokesman for Salomon Brothers, which bought the initial $1 million 15-year Ginnie Mae security issue, called the loans "the coming instrument in the market."
In September, the Federal National Mortgage Association (Fannie Mae) also began buying, pooling and reselling shorter-term mortgages.
And in early October Ginnie Mae, which had received requests from more than 50 mortgage lenders seeking approval to create their own 15-year mortgage pools, gave blanket approval for pooling 15-year loans.
"We think they're going to really take off because of that," commented Matthews of the Mortgage Bankers Association.
At the same time a FHA/VA program change allowed the creation of FHA/VA 15-year mortgages.
"The 15-year FHA mortgage has already proved to be very popular in many markets," Matthews said.
The 15-year FHA/VA mortgages currently carries a 10 percent interest rate compared with 12 percent for their 30-year mortgages. On a $60,000 mortgage, payments would be $545 for the 15-year loan and $617.40 for the 30-year loan, leading to a $106.164 saving in interest payments on the 15-year loan.
West America Mortgage Co., a subsidiary of Western Federal Savings of Denver, offers 15-year FHA/VA mortgages. Allstate Enterprises Mortgage Corp. offers both FHA/VA and conventional 15-year loans. And Citicorp Homeowners Inc. has added its own 15-year fixed rate mortgage to its catalog of fixed rate and alternative financing instruments.
At least one mortgage banker is even amortizing a version of the GEM over a 15-year period. Crown Mortgage Co. of Oak Lawn, Ill., began offering these in July. The loan can be paid off as quickly as 10 1/2 years if the payments increase 3 percent every year.
Michael Allen, owner and president of Crown Mortgage, said that mortgage has attracted individual and small business pension plans as investors and interested other mortgage companies who want to attempt something similar.
However, Matthews warns that the new 15-year mortgages are not for everyone. Monthly payments still are higher than they are for a 25- or 30-year amortized loan with an equivalent interest rate. And there are additional points that the borrower must pay up front, ranging from one point at Crown to 10 at Banco.
(A point equals one percent of the amount of the mortgage. Unlike interest payments, points are not tax-deductible.)
"You wouldn't want to pay those points if you're going to be in the house two years and then sell," said Matthews, who added that in some cases a builder may absorb some of the points.
But even if a 15-year mortgage isn't best financially for a particular home buyer, it still may be the preferred financing method.
"If the home buyers are 45 years old, they like to have that mortgage paid off by the time they retire," Matthews said.
Economist Matthews sees the investor interest in 15-year mortgages as possibly more important than borrower interest.
"Their interest in 15-year mortgages," he said, "could mean that as more people go out and start buying houses there's probably going to be plenty of mortage money around."