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With mortgage rates still near record lows, it’s no surprise that 2013 proved to be a strong year for refinance mortgage loan originations, with more and more homeowners opting for a short term mortgage instead of the traditional long-term 30-year mortgage loan.
In fact, according to Freddie Mac’s 2013 Fourth Quarter Refinance Report, borrowers who refinanced in 2013 are saving approximately $21 billion in interest over the first 12 months of their new refinanced loan.
In addition, 39 percent of the borrowers who refinanced during the fourth quarter of 2013 opted for a short-term loan, which is up 2 percent from the previous quarter and the highest since 1992.
Why? Before rates dropped to historic lows, homeowners found it difficult to refinance out of a 30-year loan into a short-term loan without a drastic increase in their monthly mortgage payment.
Contrast that with today’s rates, and homeowners can refinance into a short-term loan with similar monthly payments while increasing their home equity at a faster rate.
The ability to pay off your mortgage loan in half the time and spend less on the loan interest is the first of many short-term loan benefits. Other advantages include having your home paid for in retirement and spending less time worrying over stretching critical savings accounts and Social Security checks on your mortgage payments.
Short-term loans are also a great option for borrowers without a strict savings plan in place. Building home equity is a sort of “forced” savings plan, allowing you to pay yourself first.
However, despite the advantages and rise in popularity of short-term loans, they are not for everyone.
It’s important for homeowners to understand the real risks and terms associated with short-term mortgages before making the change.
Here are some helpful questions to answer before opting for a short term loan:
• Are you a first-time home buyer? If the answer is yes, a year 30-year mortgage loan may actually be a better fit due to a lower monthly mortgage payment, allowing time to establish financial discipline needed for home ownership.
• Are you refinancing an existing loan? Of course, the benefits that come with a short term-loan such as increased home equity and lower interest paid throughout the duration of the loan are attractive incentives. However, if you’re already 16 or 17 years into a 30-year mortgage, consider the closing costs required when refinancing.
• Can you afford a higher mortgage payment? With today’s rates at near historic lows, it’s true the monthly payment on a short-term loan will often be similar or only slightly higher from a longer-term mortgage. However, many times even the slightest increase in payment could potentially place undue strain on the borrower’s financial situation, thereby increasing the risk of not fulfilling the loan’s payment obligations.
If you have a reliable cash flow and disposable income at the end of every month, start by saving and then consider your options for home ownership. Your local and experienced mortgage lender can help you make this important decision, offering their personal market insight and lending experience to accurately analyze which mortgage loan is right for you.
John J. Stahl III is the Mortgage Director and Senior Vice President at The Coastal Bank. He can be reached at 912-201-7365 or jjstahl@thecoastalbank.com.
