Debt-conscious are shedding old mortgages Many try shorter terms for lower interest rates

November 08, 1992|By Newsday

NEW YORK -- Americans are paying off their charge cards. They're nursing the old sedan instead of taking on car payments. And now, at record levels, they're trading in old mortgages for newer ones they can pay off in as little as one-third the time.

At a time when many bankers are refinancing more old mortgages than writing new ones because of the sharp drop in interest rates, they say that up to half of the conversions involve switching from the traditional 30-year terms to 20, 15 or even 10 years.

The Federal National Mortgage Association, the nation's largest

home-mortgage investor, says 30-year fixed-rate mortgages fell last spring to less than half of its business for only the second time; they now hover at just over 50 percent.

In May, 30-year loans dropped to 49 percent of Fannie Mae's business, down from 75 percent in May 1990. At the same time, the 15-year loans rose to 35 percent from 12 percent.

Fannie Mae buys loans from a nationwide network of lenders. The last time 30-year mortgages dipped so low was in 1988, when adjustable-rate mortgages surged.

"From a working man's point of view, you've got to be crazy not to do it," said Kurt Westenberger in Oceanside, N.Y., who is refinancing a 30-year mortgage to a 15-year loan only 16 months after buying his home.

Mr. Westenberger said the drop in his interest rate, from 10 percent to 7 percent, means that for $24 more a month he will repay his $120,000 mortgage in half the time.

"I'm looking ahead to my financial security," said Mr. Westenberger, 33. "I'm a plumber, and that's strenuous work, and when you get older you can't work like you did when you were young."

Two major factors are responsible for the incredible shrinking mortgages.

The first is that mortgage interest rates are quoted at 7 percent to 8 percent, near 20-year lows. The lower rates cut mortgage costs so much that families can take on shorter loans, pay only slightly higher monthly payments and save substantial interest costs over the life of the loan. High inflation, which could effectively reduce or wipe out the benefits of those savings, is now a fading memory.

Also at work is the debt-shedding mood of the 1990s. As baby boomers reach middle age, they want to shed mortgage debt before facing their children's college bills and planning for their own retirement.

With shorter mortgages, the interest savings come two ways. First, rates for 15-year mortgages now run a half to a full percentage point below those for 30-year terms -- 7 percent to 7.5 percent, compared with 8 percent to 8.25 percent.

But more important, the stepped-up repayments cut total interest costs. For example, Paul Havemann, vice president of HSH Associates, a New Jersey financial publishing company, calculated that a $100,000 mortgage at 8.25 percent over 30 years would cost $170,456 in total interest -- with monthly payments of $751. That $100,000, repaid over 15 years at 8 percent interest would cost only $72,017, with monthly payments of $956.

As tantalizing as the savings appear, experts do caution homeowners to factor other issues into the decision. Most important, Mr. Havemann said, they should plan to stay in the home long enough to recover the $3,000 to $5,000 minimum in refinancing costs.

Another drawback, clearly, is the higher payments, about $200 a month in Mr. Havemann's example. Rather than commit themselves to such an increase, some borrowers stay with their 30-year mortgages and simply send in extra payments whenever they can. One extra payment a year can cut their loan to 22 years.

Motivations to refinance also include recent changes in the real estate market and income taxes.

"It used to be you'd buy a house, cut the grass for a few years, then sell it for a lot more than you bought it for," Mr. Havemann said. "But you're not going to make a killing in real estate any more, so you may as well invest in the house you have."

Also, income tax changes since 1986 give homeowners less reasonto pile on mortgage debt. With the top federal bracket dropping from 50 to 28 percent, the value of the interest deduction has dropped.

Manhattan co-op owner Dan Rubin cited another reason: With interest rates on many investments so low, he's better off using his money to pay down the mortgage.

"If I can reduce my debt, that's the thing to do in the 1990s, because we're looking at such low returns on low-risk investments," said Mr. Rubin, who is general manager of the Latin American and Canadian editions of Time magazine.

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