The refinancing boom may be cooling down, but the move to shorter mortgages — especially 10-year loans among pre-retirees — appears to be accelerating.
Some community banks say 10-year mortgages, once an insignificant niche option, are now accounting for increasingly large chunks of their business. For example, Rockville Bank in South Windsor, Conn., reports that 10-year loans represented a surprising one-fifth of its total residential mortgage originations in dollar terms last year.
Also, in a survey released last week, Freddie Mac, the giant federal mortgage investor, found that 28 percent of all refinancings in the first quarter of 2013 involved shortening of terms. Among refinancers with 30-year mortgages, nearly one-third switched to shorter-term replacement loans.
Though 15-year mortgages have been popular for years among homeowners who want to pay off their balances quickly, lenders say the 10-year loan — targeted directly at the demographic tsunami of baby boomers who are still employed but planning to retire in the coming decade — is on the upswing.
“There’s a lot of interest in this [10-year] product,” said Victoria Stumpf, a loan officer with Third Federal Savings and Loan in Cleveland.
Why the growing attraction to going short? Start with interest rates. With an almost-certain increase in rates on the horizon as the Federal Reserve begins to taper its purchases of mortgage bonds and Treasury securities, fixed rates on 10-year loans remain enticingly low. According to MyBankTracker.com, which surveys 7,000 lenders nationwide on rates and terms, the average 10-year fixed-rate mortgage goes for 3 percent with a fifth of a point. (A point equals 1 percent of the loan amount.)
But many community banks and smaller lenders quote much lower than that. Rockville Bank’s current rate for a 10-year — whether for refinancing or a home purchase — is 2.375 percent with no points. Third Federal’s quote for a $200,000 10-year mortgage is 2.79 percent with a closing fee of $450. For community lending institutions such as these around the country, 10-year loans tend to be portfolio investments. Rather than selling the mortgages to Freddie Mac, Fannie Mae or other investors, lenders retain them in-house. Partially as a result, rates can be lower. And since lenders that specialize in 10-year mortgages want to keep risks as low as possible on their in-house investments, they typically require borrowers to have solid credit histories and significant equity or down payments.
Picture this: You’re in your prime pre-retiree years — anywhere from the mid-50s to early 60s. You’ve got a good income, significant equity in your home and good credit scores, and you want to refinance to a lower rate. Your home is worth $250,000 and you need a $150,000 loan that will leave you mortgage-debt-free — or close to it — once you’re into retirement. You don’t want to risk potential interest-rate spikes along the way, so adjustable-rate loans are out of the question.
How does a 10-year loan stack up? Consider this comparative scenario using current rates and terms for 30-year, 15-year and 10-year loans provided by Jeff Lipes, vice president for mortgages at Rockville Bank:
●Interest rates: The 10-year’s 2.375 percent rate is the lowest by far. The rate on the 30-year fixed is 3.99 percent; on a 15-year, it is 3.25 percent.
●Monthly payments. Here’s where the shorter term and faster payoff of principal available through the 10-year mortgage can be a budget issue for some borrowers. The monthly total for principal and interest on the 30-year loan is just $715. On the 15-year, it’s $1,054. But on the 10-year, it’s nearly double what you’d pay on the 30-year: $1,406. Though over the term of the loan you pay substantially less in total interest charges, on a monthly basis the 10-year requires the most out of pocket of the three.
Frank Nothaft, chief economist for Freddie Mac, says that as part of a retirement planning process designed to leave you with lower debts at a predetermined point, a 10-year mortgage “could be an ideal product,” provided you’ve got the resources to handle the higher monthly payments. Ditto for a 15-year loan.
Bottom line: If you’re looking ahead, want to lock in what may be once-in-a-lifetime low rates and like the idea of getting rid of all home-loan debt for your retirement years, check out the mortgage-shortening trend. A 10-year just might be a fit.
Ken Harney’s e-mail address is firstname.lastname@example.org.