A trend toward shorter term mortgages was evidenced by the recent Freddie Mac Quarterly Product Transition Report that shows over one third of American homeowners who refinanced their mortgages in the second quarter of this year chose a 15- or 20-year loan to replace their prior 30-year fixed-rate obligations. The 37% of homeowners who chose shorter terms also includes the largest group of people who chose less-than-10-year loans since way back in the third quarter of 2003 when the U.S. housing market was really booming. The Freddie Mac Quarterly report also showed a trend away from adjustable rate loans, as fixed-rate loans comprised over 95% of all refinanced loans during the same quarter. As Frank Nothaft, Freddie Mac vice president and chief economist, stated in a press release accompanying the report, "Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the second quarter. For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term.”
Although there are many different factors that have diminished the attraction of long-term loans, many economists feel that the recent widespread prevalence of super low interest rates across the country have encouraged many people to reduce the lengths of their mortgage loan terms. Instead of living with a mortgage over their heads for a full three decades, consumers who believe they will want to sell their homes in less than 30 years are wondering why they should sell their homes with a mortgage attached when they could probably sell them at a higher price and more easily it they were free and clear of loans and other encumbrances.
Although shorter mortgage terms do allow homeowners to save thousands of dollars in interest compared to a long-term loan, the lien holders will also get a smaller tax deduction over the period they hold their loans. Another factor may include those homeowners who feel a 30-year mortgage obligation is an unwise use of their shrinking funds when they have little or no equity in their homes at all. While the economists may continue to speculate about the reason more people are choosing shorter mortgages, the market data clearly shows that almost all new loans now originating are being used to refinance existing homes instead of purchasing new ones.
