Tom Kelly: In the twos? Never thought we’d get there

For a guy who once begged for a home loan under 12
percent, I could not believe my ears.

“For people with decent credit and some equity, we’re
quoting fixed-rate loans in the twos.”

The conversation took place on a city bus, between two
friends headed downtown for lunch. Local lenders soon
verified the information. Better yet, family friends
validated it by sharing their second-home example.

Home mortgages in the twos? Unchartered territory.
While 30-year, fixed-rate loans have been under four
percent at several times this year, I underestimated the
possibility of a lower rate with a shorter term. As loan
terms are reduced, so is the lender’s risk in extending
credit, hence a lower interest rate.

To confirm what I heard on the bus, I made a few calls
to lenders.
Mark Palmer, vice president of loan production for Seattle
Mortgage, said a growing number of his refinance customers
have requested 15-year and 10-year loans and a few have
made inquiries on new-purchase loans. Rates and fees are
the same for both principal residences and second homes.

“Consumers are much more savvy about saving money,”
Palmer said. “They don’t want to re-start the 30-year
clock on a mortgage, especially if they have been in the
home for a while. When they see they can get a 10-year
loan in the two’s, they are willing to listen to what’s
possible.”

It used to be that borrowers tended to take the lowest
interest rate available, knowing they would probably sell
and move on to a bigger and better home. Now, with double-
digit appreciation no longer a given, they are staying put
longer and viewing the home more as a comfortable shelter
rather than an investment gamble.

Recent data supports the growing pay-it-off mindset. A
recent Freddie Mac report showed that 31 percent of recent
refinancers shortened their loan terms, which is the
second highest level since 2002. The Mortgage Bankers
Association reported that applications for 15-year loans
were at their highest point of the year.

“Historically low rates and an average of three-
quarters of a percentage point difference between 30- and
15-year mortgage fixed-rate mortgages are important
drivers for moving to a shorter term,” said Frank Nothaft,
Freddie Mac’s chief economist.

(This week, fifteen-year fixed-rate mortgages averaged
2.97 percent, according to Freddie Mac’s weekly mortgage
market survey. The 30-year fixed-rate mortgage averaged
3.75 percent.)

Lenders say many consumers still are unaware how low
rates have dropped in relation to their present interest
rate. Others simply don’t want to go through the hassle of
refinancing even though they might save a few bucks each
month. Unless you are haunted by an immediate want or need
for a large sum of money – for example, for medical
expenses or major investment – the decision to refinance
should be based on how long you will be in your house. If
you are going to be in the house a short time, the fees
and other costs may outweigh even the record-low interest
rate.

If you are reluctant to refinance because of your
unknown time in the home, there are ways of reducing your
loan principal yourself without refinancing. You can
always pay more each month toward the principal. Another
option gaining popularity is to take the money you would
pay for refinance fees (plus maybe other cash you’ve
saved) and plunk it down on the principal portion of the
loan. The money would pay off the original loan faster and
save interest along the way. It’s not a bad idea
considering you could borrow the money back via a lower-
fee (but higher rate) home-equity loan.

One family that took advantage of a fixed-rate loan in
the twos were friends who restructured the ownership of
their lake cabin. After a remodel that included a
bunkhouse and an enhanced living room and kitchen, the
parents and their three adult children all “went on the
line” for a new mortgage. In essence, four parties with
equal shares in the property signed for the mortgage. All
parties pay a monthly amount into a fund that takes care
of the mortgage, property taxes, insurance and
maintenance. The mortgage, a 10-year loan at 2.65 percent,
is automatically deducted each month from the fund.

“We could have done it with a higher payment and longer
term,” the father said. “But now it will be paid off when
the kids are still relatively young. While we didn’t
really want to get a mortgage, having a loan in the twos
doesn’t feel so bad.”

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the
Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a
Tearful Retirement” is available online at Apple’s
iBookstore, Amazon.com, Sony’s Reader Store, Barnes &
Noble, Kobo, Borders Books, Diesel eBook Store, and Google
Editions. It mirrors a recent article by CNN on the
benefits of the country, including increased rental
possibilities.