Why 10-year loans are on the rise
WASHINGTON — The refinancing boom may be cooling down, but the move to shorter mortgages, especially 10-year loans among preretirees, appears to be accelerating.
Some community banks say 10-year mortgages, once an insignificant niche option, are accounting for increasingly large chunks of their business. For example, Rockville Bank in South Windsor, Conn., reports that 10-year loans represented a surprising one-fifth of its total residential mortgage originations in dollar terms last year.
And in a new survey, Freddie Mac, the giant federal mortgage investor, found that 28 percent of all refinancings in the first quarter of 2013 involved shortening of terms. Among refinancers with 30-year mortgages, nearly one-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 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.
"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 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.)
But many community banks and smaller lenders quote much lower than that. Rockville Bank's current rate for a 10-year — whether for refinancing or a home purchase — is 2.375 percent with no points. Third Federal's quote for a $200,000 10-year mortgage 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. Partially as a result, rates can be lower. And because 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.
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 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.
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, check out the mortgage shortening trend.