With mortgage rates dropping, homeowners are quick to realize the double benefit of refinancing now. Not only do they get a low rate that reduces their monthly payments, they are also locking in a shorter duration to be free of debt sooner and build up home equity faster.
Freddie Mac released a report recently that shows that 31 percent of homeowners who refinanced during the first quarter of this year reduced their mortgage term from 30 years to 20 or 15 years. That's down slightly from fourth quarter 2011, when 34 percent shortened the duration of their loan. The all-time high was in 1992, when 42 percent of homeowners refinanced into shorter mortgages.
Bankrate's weekly national Interest Rate Roundup reports 15-year-fixed mortgage rates averaging 3.15 percent, compared to 3.94 percent for the 30-year-fixed. That spread of nearly a percent between the two, along with super-low rates, is causing many homeowners to apply for the shorter-term mortgage while locking in the lower of the two rates.
Granted, a 15-year-mortgage could still translate into higher monthly payments than a 30-year loan, but homeowners are taking a long view, with the goal of shedding debt significantly sooner without too much financial pain in the meantime. Since more of their payment goes toward principal with the shorter loan, home equity builds up faster, which could be important if homeowners want to borrow against it in the future or take out a reverse mortgage in their retirement years.
Are you planning on refinancing into a shorter mortgage?
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