U.S. Homeowners Shift to 15-Year Loan Refinancing to Add Equity

By Prashant Gopal - Jun 15, 2011 9:00 PM PT .

While millions of U.S. homeowners have negotiated lower monthly mortgage bills in an effort to avoid foreclosure, Cecelia Kirchman happily added $250 to her payment when she refinanced last August.

Kirchman took out the new loan to reduce her interest rate to 4.5 percent from 7 percent, and slice the term in half to 15 years. She said she has paid down more principal in the past 10 months than in the previous six years of owning her home in the suburbs of Washington, D.C.

“It’s unbelievable,” said Kirchman, a marketing director for a financial-planning firm who lives in a ranch-style house in Frederick, Maryland, with her husband, Mark. “For very little more each month, I’m paying it off much more quickly.”

The couple are among the growing number of “equity builders” -- creditworthy homeowners with steady jobs and enough cash to lock in near record-low interest rates and shorten the length of their loans, said Stuart Feldstein, president of SMR Research Corp., a market-research firm in Hackettstown, N.J., that focuses on financial services. Others are opting for what’s known as a cash-in refinancing, in which borrowers write a check at the closing to shrink the amount they owe on the property.

The rationale for equity building when foreclosure isn’t a threat is simple. The future interest payments homeowners can forgo by reducing the length of their loan or pumping cash into the deal is greater than what they’d otherwise earn in safe investments such as a bank account or money-market fund, SMR’s Feldstein said. As an added incentive, the 15-year fixed mortgage is the cheapest relative to the 30-year loan than it’s ever been.

15-Year Loans
The portion of borrowers refinancing in January who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic Inc. (CLGX), a real estate information firm in Santa Ana, California. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009.

The share of cash-in refinancings reached a record 44 percent in the fourth quarter, according to data from Freddie Mac dating to 1985. While the share fell to 21 percent in the first quarter as mortgage rates climbed, it was almost double the quarterly average over the past 26 years.

“They are people who -- rather than waiting for home values to rise -- are taking matters into their own hands,” Feldstein said. “They are building equity on their own.”

Refinancing applications have increased 36 percent since the start of the year, according to a Mortgage Bankers Association index. The average weekly rate is about a third below last year’s pace as millions of Americans can’t qualify for a new loan.