Patty, an accountant, found it easy to "work out a lot of numbers" when she and a friend decided to buy a home near Collegeville, Pa., a Philadelphia suburb. Patty and her friend checked out the total interest paid for traditional 30-year mortgages and 15-year mortgages, plus a less common type of loan that is paid off in 20 years.
"The difference in total interest was astronomical," she said. "The 15-year had much less interest but was scary because the payments were so high. We worked out the tentative payments for a 20-year loan and found we would still be able to pay off the debt quicker, own sooner and not spend a fortune in interest." Patty and her friend applied for a 20-year mortgage.
Some homeowners who are refinancing also are going for shorter-term loans. Frank Keller, of Audubon, Pa., said he had refinanced his 30-year, 10 1/2 percent mortgage with a 20-year loan at 8 7/8 percent.
"Essentially I knocked 6 1/2 years off the mortgage, and it won't cost me a penny," said Mr. Keller. "The monthly payments are within about $3 a month of each other."
According to the Federal National Mortgage Association (Fannie Mae), Patty (who did not want her full name used) and Mr. Keller are among an increasing number of homebuyers who are choosing alternative short-term mortgages even though interest rates for conventional 30-year mortgages reached a four-year low this summer.
Throughout the region, mortgage rates have been drifting gently downward since early 1989, when 10.72 percent plus 3 points was the average, according to Peeke LoanFax Inc., a Gaithersburg mortgage consulting firm that canvasses the region's lenders. Peeke's latest average for July was 9.32 percent.
Although no August average is available, Maryland National Mortgage Corp., the largest lender based in the state, is quoting 30-year, fixed-rate mortgages at 8.75 percent with 3.5 points, or 9.25 percent with 1.5 points. Points are fees paid to the lender. Each point is 1 percent of the loan principal, so 3.5 points on a $100,000 mortgage is $3,500.
Fannie Mae records show that about 30 percent of homebuyers nationally used some type of mortgage with a term shorter than 30 years in May and June, more than double the percentage 18 months ago. In July, a still-high 27 percent were picking short-terms.
Fannie Mae, a publicly owned corporation, buys packages of mortgages from lenders and resells them to investors in the secondary market. The process keeps money flowing to lenders, who continue to service the mortgages. About one of every eight mortgages issued goes to Fannie Mae.
The Federal Home Loan Mortgage Corp. (Freddie Mac), another publicly owned corporation that buys mortgages from lenders and sells them to investors, and the Mortgage Bankers Association of America, a trade group, have also reported increasing use of short-term mortgages.
Short-term mortgages "provide enormous benefits to homebuyers," said James W. Nelson, the mortgage bankers' president. "All those who are out there looking for a home should also be looking at what options are available to them for financing that home."
Freddie Mac said an increase in the use of 15-year mortgages had boosted its fixed-rate loans to 91 percent in the first quarter of the year, up from 87 percent in the same quarter a year ago.
The most-popular shorter-term loans currently attracting borrowers are:
* Fifteen-year mortgages. These have been popular with some buyers for a number of years and are available from most lenders. The interest rates generally are about half a percentage point below those of 30-year mortgages. Buyers build equity in their homes at much faster rates and pay much less interest, but monthly payments are sharply higher than those with 30-year loans of the same amounts.
* Twenty-year mortgages. Peter J. Wissinger, senior vice president of Norwest Mortgage Inc., of Des Moines, Iowa, calls 20-year loans "a middle-of-the-road option" that can let buyers gain equity faster and reduce interest costs with more moderate increases in monthly payments than with 15-year mortgages. These mortgages often have interest rates slightly under 30-year rates, but some lenders offer no rate advantages.
* Balloon mortgages. These generally have terms of five or seven years, but are amortized over 30 years and have payments matching those of 30-year loans. When the balloon terms are up, borrowers must pay off the mortgages or refinance at current interest rates. During the balloon terms, borrowers get fixed rates as much as three-quarters of a percentage point below 30-year fixed rates, resulting in considerably lower monthly payments. Balloons are especially popular with buyers who plan to occupy their homes for only a few years before moving on.