Standard 30-year mortgage regains popularity

June 13, 1993|By American Banker

The 30-year fixed-rate home loan -- the mortgage industry's old standby -- is enjoying a surge in popularity after having lost ground last year to 15-year models, a study shows.

The trend suggests a marked change of heart among homeowners participating in the refinancing boom, economists

and lenders say.

As interest rates plunged last year, many consumers refinanced into 15-year mortgages to pay off their loans more quickly. But this year, experts said, more consumers are interested in reducing their monthly payments, and 30-year mortgages entail smaller payments than 15-year loans.

In the first three months of this year, 49 percent of refinancing homeowners with 30-year mortgages chose the same sort of loans again, according to the study by the Federal Home Loan Mortgage Corp. The share was up from 40 percent a year earlier and was higher than at any time since the third quarter of 1991.

Meanwhile, the percentage of refinancers with 30-year mortgages who picked 15-year loans dropped from 46 percent to 29 percent, the lowest since the first quarter of 1991.

The study was based on an examination of loans sold to Freddie Mac and was restricted to refinancings. But lending executives said a rise in the popularity of 30-year mortgages over 15-year loans has been evident across the board in recent months.

"It's been gradual, but it's very distinct," said John Delaney, chief executive of TransCoastal Mortgage Corp. in Bellevue, Wash.

Some lenders welcome the shift. For example, companies that sell their new loans on the secondary market but continue to service them can earn fees longer with 30-year loans, said Judith Berry, chief financial officer of American Residential Mortgage Corp. in La Jolla, Calif.

Some banks and thrifts, however, like to write 15-year loans and hold them because the loans can fit well with an institution's liabilities.

"We would much rather originate 15-year loans than 30-year loans," said Joseph Krull, chief financial officer of Standard Federal Savings Bank in Troy, Mich.

JTC Many buyers gravitate to 30-year loans to limit monthly payments.

Evidently, this year's crop of refinancing customers is increasingly taking the same stance. Many of the homeowners are "people who are just making ends meet and are more concerned with their current financial situation," said Mark Zandi of Regional Financial Association, in West Chester, Pa.

These people may believe that interest rates have bottomed out and that now is the time to lock in a low-payment mortgage for the long term.

On the other hand, 15-year refinances can make sense for homeowners who are in sound financial situations and can afford to accept high monthly payments for a quicker loan payoff.

Mr. Zandi described this type of homeowner as a relatively affluent professional with little or no debt obligations other than a mortgage. For such a person, the 15-year mortgage is a natural.

The consumer "has paid down his credit-card debt, paid off his student loans, no longer has a car loan, and is thinking about paying for his kids' college education or, further down the line, his own retirement. The mortgage is the last thing to go."

Robert Van Order, Freddie Mac's chief economist, agreed with Mr. Zandi's assessment. "Two types of homeowners are refinancing," he said. "Those who refinance into 30-year mortgages want lower payments, while those preferring 15-year

mortgages want to pay off their loans faster."

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