After being blindsided by a job loss last spring, sales exec Ren Chirakos didn’t need his new MBA degree to calculate the scary numbers: The math got simple real fast.
Zero income + new COBRA bills + a house payment = something had to give in the Chirakos family budget. The answer: refinancing his 30-year home loan to a shorter mortgage that tapped into the trend of ever-shrinking interest rates.
“I needed to keep my house,” said Chirakos, who since has found work at a different company in Cuyahoga Falls, Ohio. His wife is a stay-home mom who cares for their two daughters. “It forces you to look at 'OK, where is our money going?' You start looking for ways to shave fixed expenses. It really gives you cause to think.”
Chirakos was paying 5.375 percent on a 30-year loan before he became a victim of downsizing at toolmaker Snap-on Inc. As rates sank and slipped over the summer, he watched and waited. Then he pounced, locking in a 20-year, fixed-rate loan at 4.3 percent and slashing $140 off the monthly bill for his $220,000 home. With excellent credit and little debt, the re-fi cost him $900, so will pay for itself in about six months. “Every little bit helps,” he said.
For many refinancing homeowners, going shorter is suddenly more appealing. Fixed mortgages of 15 and 20 years are quickly gaining fans among those who previously held 30-year loans, balloon mortgages and adjustable rates, according to a new report from mortgage giant Freddie Mac. The number of fixed-rate, 15- and 20-year loans are at their highest level since 2004, the government-controlled company said.
“The psychology of the recession” is simply altering how many Americans look at home ownership, said Jason Biro, author of “Saving Your American Dream: How to Secure a Safe Mortgage, Protect Your Home, and Improve Your Financial Future.”
During the real estate boom, thousands of consumers bought and sold homes every few years, cashing in their fast-built equity to upgrade in size or neighborhood. But since the housing bust, many of those owners have found themselves strapped with lower-valued houses and unaffordable mortgage payments. For generations before the boom, people had viewed their homes as stable, long-term investments — safe places for their money, and safe places to stay for a while.
“We’re seeing a return to that thinking — although it’s what I call a forced return,” said Biro, a 14-year veteran of the real estate and lending business. “With home values plummeting, you would think people would shy away from putting more money into their homes. But homeowners see they won’t be able to sell or move any time soon. The economy is shaky. In this respect, they’ve been forced to re-evaluate what owning a home is really about: the long term.”
Who should consider swapping their fixed, 30-year loan for a shorter variety?
Let’s start with who should not. This strategy is probably not best, Biro said, for homeowners in “financial distress” — those without stable jobs, good credit or cash in the bank. (Chirakos was an exception because he had no credit-card debt, no car payments and some home equity).
Homeowners with discretionary money — those who can afford to absorb a slightly higher monthly mortgage payment — are ideal candidates, several lending experts said. A minority of refinancers, like Chirakos, can assemble shorter-term mortgage deals that actually trim their monthly payments or leave them unchanged. Those outcomes are more apt to accompany 20-year loans. Typically, switching from a 30- to a 15-year mortgage brings at least a small bump in payments.
Even so, some owners are choosing to refinance to a shorter term even if it means paying a bit more. Blame the financial fright of hard times — and re-embracing old-school values. “There has been a shift in sentiment to pay down personal debt involving mortgages faster,” said Todd Huettner, president of Denver-based Huettner Capital, a real estate mortgage brokerage.
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Consider these side-by-side comparisons. For a $200,000 mortgage, a 30-year loan fixed at 4.5 percent carries a monthly principal and interest payment of $1,013 a month. Over the life of the loan the homeowner will pay $164,813 in interest. For the same mortgage, a 15-year loan at 4.5 percent costs $1,530 a month ($517 more), but over the life of the loan the homeowner will pay $75,397 in interest, for a savings of $89,416.
And with rates dropping repeatedly in recent months, qualified owners might be able to refinance for 15 years at 4 percent, for a monthly payment of $1,479.
“Many people are much more motivated to gain the long-term savings even if they must pay more each month,” Huettner said.
“These homeowners see that money they could typically put into an interest-bearing savings account or a CD is not making a decent return,” Biro added. “And they’re wary of putting money into the stock market. ... They are keeping their money close to home, literally. ... By paying their home off sooner, many people feel they will be able to weather an impending storm.”
What’s more, the fees attached to shorter-term, fixed loans “are negligible” compared with those that come with 30-year mortgages, said Edward Mermelstein, a real estate attorney and co-founder of Rheem Bell & Mermelstein, a real estate law firm with offices in New York and Moscow.
“As long as the rates continue to stay as low as they are, it should continue to make sense to go after the 15-year term,” Mermelstein said. “It makes sense to pay down the loan at the highest price you can.”
Huettner warns, however, that if your budget is a bit squeezed by current bills, a 15-year mortgage may be too risky. “Don’t try to force yourself into a 15-year-loan,” he said.
Other brokers caution their clients to avoid shorter-term, fixed loans all together.
Owners who simply to crave to pay off their mortgages sooner may be missing one vital wallet reality: “They lose all flexibility with their largest liability,” said Jon Prettyman, a senior broker at the Columbia, Md., branch of Waterstone Mortgage Corp. “Right now, all money is cheap. Fixed and ARM products are as low as 3 percent. The people that have the ability to pay the larger payment are doing so because it is cheap" from a long-term interest perspective.
But, Prettyman contends, “the consumer would be better off taking the 30-year and saving the difference in payment from the 15-year. ... What happens when the kids need money for school? Many people are so worried about paying the bank back that they forget to give themselves the cash cushion they need to remain flexible in this strenuous market.”
Shorter-term mortgages simply “help the banks get their money quicker. Granted, it is slightly cheaper,” Prettyman said. “That money would be so much better in the family bank account. We, as taxpayers, have given these banks enough. Let’s line our pockets as consumers for awhile and see if we can get the homeowner back in the black.”