Why U.S. Homeowners And HARP Households Have Ditched The Traditional 30-Year Fixed Rate Mortgage
The 15-year fixed rate mortgage is popular.
Last quarter, a growing number of U.S. households refinanced out of 30-year fixed rate mortgages, and into 15-year and 20-year ones. More refinancing households moved to shorter loan terms than during any quarter in 10 years.
Low mortgage rates are part of the reason. The HARP refinance program is the other.
41% Of Refinancing Households Left The 30-Year Fixed
According to Freddie Mac's quarterly Product Transition report, between July - September 2013, more than 2 of every 5 refinancing households with an existing 30-year fixed-rate mortgage elected to refinance into a 15-year or 20-year fixed rate loan.
The reading marks a 6 percentage point increase over the quarter prior.
The rush to ditch the 30-year loan makes sense. 15-year mortgage rates remain historically cheap as compared to their 30-year, fixed-rate mortgage counterpart.
- Between 2000-2012, 15-year rates were 0.52 percentage points below 30-year rates, on average
- Last July-September 2013, 15-year rates were 0.96 percentage points below 30-year rates, on average
Today's 15-year fixed rate mortgages are nearly doubly-discounted and savvy rate shoppers recognize great deals. At today's mortgage rates, the total interest paid to complete a 15-year loan is 65 percent less than a comparable 30-year loan.
Never in history have savings like this been possible.
HARP 2.0 Below 105% LTV Dominated By 15-Year Fixed
The 15-year mortgage has been especially popular among users of the Home Affordable Refinance Program (HARP). HARP is the government's mortgage program for underwater homeowners.
Sometimes called "The Obama Refi", the HARP refinance gives homeowners whose homes have lost equity the ability to refinance without taking on new or additional private mortgage insurance (PMI) coverage.
Via HARP, homeowners who put 10% down at the time of purchase can refinance into a loan with "10% down PMI", regardless of whether their home is currently underwater. Similarly, homeowners who put 20% down at the time of purchase but ho no longer have that equity can HARP refinance without an accompanying PMI payment.
HARP was initially launched as part of the American Reinvestment and Recovery Act of 2009 and it's been used more by more than 2.9 million U.S. households. Among these refinances, patterns have emerged.
One such pattern links existing home equity to loan term. The more equity in a refinanced home, the more likely the homeowner will refinance into a 15-year loan term.
- LTV of 80 - 105 percent : 19% refinanced into a 15-year or 20-year mortgage
- LTV of 105 - 125 percent : 14% refinanced into a 15-year or 20-year mortgage
- LTV of 125 percent or more : 12% refinanced into a 15-year or 20-year mortgage
As HARP 2.0 expands to reach more homeowners -- possibly in the form of HARP 3.0 -- the share of U.S. households refinancing to 15-year loans may increase.
See Today's HARP Mortgage Rates
Today's interest rate spread between the 15-year and 30-year mortgages is near historical highs. Take a look at today's rates and compare them to your budget. With zero-closing cost loans still available, the amount of money you can save can be huge.
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