Jump from existing 30-year loans to 15-year variety?

By John Adams

For the AJC

About the only bright spot in the real estate business today is the mortgage industry, where Fed-induced rock bottom interest rates are fueling a modest boom in refinancings. As recently as this week, 30-year fixed rate loans were available for acquisition or replacement financing as low as 4.25%, with the 15-year term being offered at a remarkable 3.375% with zero points.

Some current borrowers are taking cash out of their house just to keep up with the bills, but lenders tell me they are mostly seeing conservative borrowers jumping from existing 30-year loans at 5% or higher to the shorter term 15-year variety. There are two reasons as to why now is a particularly good time to consider this strategy:

1. The interest rate differential between 30- and 15-year fixed rate loan programs is unusually large. And because rates overall are so low already, this "spread" of 0.875% rewards the borrower who is willing to make the commitment.

During normal economic times, lenders typically look for a spread of about 50 basis points (exactly half a percentage point) in interest rate between 15- and 30-year loans. The explanation is that a 15-year loan pays back principal faster and is thus less risky that the twice-as-long 30-year loan.

Furthermore, as rates decline, the degree of rate difference tends to lessen. However, the lending market is as worried as everyone else about the uncertainty in the economy and right now, investors feel more comfortable in 15-year loans than 30-year loans. Thus, the near-double reward as reflected in the lower rate.

2. Perhaps more importantly, shifting to a lower rate 15-year program from your existing 30-year loan may not result in any increase in monthly payment. Depending on the remaining term of your 30-year loan, the lowered rate may more than offset any increase in principal payment which causes the loan to be paid off in 15 years.

For example, suppose you took out a 30-year loan for $200,000 in November 1997 at a rate of 7.0%. This month marks your 13th year of payments under that loan. Your principal and interest payment is set at about $1,330. If you refinance your current balance of approximately $158,000 at 3.25% for a 15-year term, your P&I payment becomes $1,110, saving you over $200 per month and shaving a full two years off your repayment schedule.

Yes, there are closing costs to be paid, but those can be added to the loan amount or they can be paid by the lender in exchange for a slight rate increase on the new loan. In either case, you are way ahead if you decide to stay in the house for more than a couple years.

As always, I recommend that you talk with your accountant first, then shop and compare among established local lenders for the best rate and terms.

John Adams is an author, broadcaster and investor. He answers real estate questions on radio station WGKA (920) every Saturday at noon.

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