The refinancing boom may be cooling down, but the move to shorter mortgages — especially 10-year ones among pre-retirees — appears to be accelerating.
Once an insignificant niche option, 10-year mortgages are now accounting for increasingly large chunks of business for some community banks. Rockville Bank in South Windsor, Conn., for example, reports that 10-year loans represented a fifth of its residential mortgage originations in dollar terms last year.
Plus, a new survey by Freddie Mac, the giant federal mortgage investor, found that 28 percent of refinancings in the first quarter involved shorter terms. Among refinancers with 30-year mortgages, nearly a 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 are reporting that the 10-year loan — targeted directly at the demographic tsunami of baby boomers 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 increasing attraction of shorter-term loans?
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. 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, according to MyBankTracker.com, which surveys 7,000 lenders nationwide on rates and terms.
But many community banks and smaller lendersquote much lower than that. Rockville Bank’s current 10-year rate is 2.375 percent with no points. Third Federal’s quote for a 10-year mortgage of $200,000 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, which can result in lower rates. And since lenders who 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, 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 to 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 faster payoff of principal 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: $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 interest, on a monthly basis the 10-year requires the most out of pocket.
If you can handle the higher payments, a 10-year mortgage “could be an ideal product” as part of a retirement planning process designed to leave you with lower debts at a predetermined point, said Frank Nothaft, chief economist for Freddie Mac. 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.
Kenneth Harney is a syndicated columnist.