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Mortgage rates: 15-year loan gains popularity

Mortgage rates for 15-year loan fall below 3 percent for first time. Homeowners are taking advantage of low mortgage rates to refinance, but with terms that will let them pay off their loan before retirement

A new home is shown for sale in a development in Pleasant Hills, Pa., in this January file photo. The average mortgage rates for a 15-year fixed loan fell below 3 percent for the first time, causing a surge in 15-year loan applications not seen in a decade.

Gene J. Puskar/AP/File

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AsĀ mortgageĀ ratesĀ sink deeper into record territory, homeowners are refinancing into 15-year loans at a pace not seen in a decade, aiming to pay off their debt in time for retirement.

Freddie Macā€™s latestĀ mortgageĀ rateĀ survey showed the traditional 30-year fixed-rate loan averaged 3.75 percent this week, down from 3.78 percent last week. It was the fifth straight week of record lows.

Even more eye-catching in Thursdayā€™s survey was the average for a 15-year fixed loan ā€” 2.97 percent, down from 3.04 percent a week ago. It was the first sub-3 percent reading in the nearly 21 years that Freddie has tracked the 15-year loan.

With housing markets still troubled, theĀ ratesĀ are mainly benefiting refinancers whose luck or self-discipline has left them with significant home equity. Purchase lending remains sluggish: TheĀ MortgageĀ Bankers Association says that fewer than a quarter ofĀ mortgagesĀ these days are used to buy homes.

But the latest surge in refinancings caused the trade group last week to boost its projection forĀ mortgage volume this year by nearly $200 billion, to $1.28 trillion.

People refinancingĀ mortgagesĀ often debate the merits of 15-year or 20-year loans that may hasten their payoff date but require bigger payments than a 30-yearĀ mortgage. At theĀ ratesĀ quoted this week by Freddie Mac, the monthly principal and interest payment on a 30-year fixed loan of $315,000 would be $1,458.81, compared with $2,170.79 for a 15-year loan.

During the housing boom, few refinancers even considered shorter-termĀ mortgages, which made up just 10 percent of all refis in 2006. To the regret of many, they instead extracted as much bubble-era equity as they could by taking on largerĀ mortgagesĀ with long repayment times, and often with risky characteristics.

ā€œPeople were getting 30-year interest-only loans, and they were pulling out all the cash they could,ā€ said Richard T. Cirelli, president of RTCĀ MortgageĀ Corp., a Laguna Beach, Calif., loan brokerage.

ā€œNow itā€™s just the opposite ā€” they want shorter-term loans, and theyā€™re strategizing to get theĀ mortgagepayoff to coincide with their retirement,ā€ Cirelli said. ā€œWeā€™re seeing 20-year loans, 15-year loans and even quite a few 10-year loans.ā€

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Instead of cash-out loans, some borrowers are even putting cash in when they refinance, he said ā€” for example, to get their balances down to $417,000 for a one-unit property, the maximum amount at which the lowest interestĀ ratesĀ are available.

Also contributing to the trend: recent changes in the Obama administrationā€™s Home Affordable Refinance Program, which cut the fees for certain borrowers getting new loans if they reduce the term of theĀ mortgageto less than 30 years.

By Freddie Macā€™s count, 31 percent of the refinancers in the first quarter of this year opted for shorter-term loans.

That is the largest percentage since 2002, when the typicalĀ rateĀ for a 15-year home loan ratcheted down over the course of the year from about 6.5 percent to less than 5.5 percent. About 35 percent of refinancing homeowners chose shorter-term loans that year, saving themselves about half a percentage point in interest compared with a 30-year loan, Freddie Mac economist Frank Nothaft said.

The type of borrower in both cases was the same, according to Nothaft ā€” people in their 40s and 50s whose incomes had risen enough that they could afford hundreds of dollars more each month to pay off more principal.

ā€œIt costs them more, but theyā€™re looking to own their homes free and clear when they retire,ā€ Nothaft said.

The Freddie Mac surveys assume that borrowers pay about 0.75 percent of the loan amount to the lender in upfront fees and discount points. Solid borrowers who shop around often find slightly betterĀ rates, and homeowners also can lower theĀ rateĀ by paying additional discount points.

The survey does not include third-party costs such as appraisals and title insurance.

MortgageĀ ratesĀ tend to rise and fall along with the yield, or effective interestĀ rate, on U.S. government debt. The 10-year Treasury note serves as a benchmark for fixed-rate loans.

Five years ago, in June 2007, the average yield on the 10-year Treasury was above 5 percent, and late last June it exceeded 3 percent. The yield fell to 1.58 percent on Thursday, as investors troubled by the threat of defaults in European countries crowded into the perceived safety of U.S. government bonds.

ā€œIt would have been hard to find economists at the beginning of this year who thought weā€™d see this kind of decline inĀ rates,ā€ Nothaft said. ā€œI certainly did not.ā€

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