The refinancing boom may be cooling down, but the move to shorter mortgages – especially 10-year loans among pre-retirees – appears to be accelerating.
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.
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.)
Picture this: You’re in your prime pre-retiree years. You’ve got a good income, significant equity in your home, 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 scenario using current rates and terms 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.
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