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15-year mortgage has advantages for some

WALNUT CREEK, Calif. — The 30-year fixed-rate mortgage has been a stalwart of today's real estate market for homeowners looking to refinance. Now it's facing competition from the 15-year fixed-rate mortgage.

In August, the number of applications for 15-year refinancing loans submitted nationwide through the LendingTree.com website was up 29 percent from August 2010, while 30-year refinancing loans saw a 12 percent increase.

The 15-year loans result in huge savings in terms of interest payments but require larger monthly payments than a 30-year loan.

In the past few weeks, there has been a big increase in homeowners who are looking to refinance into a 15-year-loan, said Kevin Conlon, senior vice president of operations at Mason-McDuffie Mortgage in San Ramon, Calif.

Retirement considerations play a role along with a desire to build equity faster.

Homeowners are thinking, "I really don't want to restart the clock for 30 years if I'm retiring in 20 years," he said.

The best candidates to consider these loans are homeowners who have paid down a 30-year mortgage for at least five years, have sufficient equity and excellent credit, are secure about their job future, and can handle the higher payments, say mortgage professionals.

"It can shave years off their mortgage," Conlon said.

Another point worth considering is that homeowners with 30-year mortgages can always increase their monthly payments to pay down their mortgage faster.

"This (option) is a great compromise for many borrowers," Marr said.

The average interest rate for a 15-year fixed-rate mortgage was 3.30 percent for the week ending Sept. 15, according to mortgage giant Freddie Mac. For the 30-year fixed, the average interest rate was 4.09 percent.

And the shorter time frame of the 15-year loan translates into paying much less interest than a 30-year loan.

Say a borrower had taken out a $330,000 30-year fixed-rate mortgage with a 5.25 percent interest rate five years ago and had paid down the balance to $300,000. If the balance was refinanced into a 15-year mortgage at 3.5 percent, the monthly payments would now be $2,144.

If the balance was refinanced into a 30-year loan with a 4.25 percent interest rate, monthly payments would be $1,475.

Pros and cons of 15-year mortgage

Advantages:

• Own your home in half the time.

• Builds equity faster while paying significantly less in interest.

• Interest rates are typically 0.5 to 1 percentage points lower.

Disadvantages:

• Monthly payments are higher.

• The maximum mortgage interest tax deduction is less because the borrower is paying less interest over the life of the loan.

• If borrowers become unemployed or if their income takes a dramatic hit because of a financial emergency, it will be harder to keep up with the payments.

15-year mortgage has advantages for some 09/24/11 [Last modified: Friday, September 23, 2011 8:10pm]
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