There is one housing trend that may stand alone as a bright side amid the protracted storm that shadows the nation’s housing market.
Perhaps it’s the bleak economy, ongoing political battles, or lingering wars, but people’s attitudes toward their mortgages may be changing. Instead of viewing them as a lengthy, but steady process of building equity toward a lifelong goal of homeownership, some people are looking to pay off their mortgages earlier.
In doing so, they are suffering a little more now for a big benefit later. Not to mention the benefit of mortgage rates that many agree may never be this low again in our lifetimes.
Some mortgage brokers are seeing as much as many as half the number of mortgages they write come from homeowners refinancing from their standard 30-year, fixed-rate mortgages to 20- or 15-year, fixed-rate mortgages.
And many of those are people who financed or refinanced in the last two years, when rates were considered historically low at around 5%, to 15-year fixed mortgages at the current rates of around 3.3%.
“I would say 50% of the customers who come to us are looking for a shorter-term loan,” said Fred Arnold, a mortgage consultant with American Family Mortgage, which does about $130 million per year in mortgages throughout California.
The bottom line: It just makes good financial sense.
“I think people are waking up to the fact that they’ve never seen rates this low,” Arnold said. “The prevailing attitude among Baby Boomers was ‘keep the mortgage and build up equity.’ Now it’s ‘I need to retire soon, I need to get this thing paid off.’ They’re thinking, ‘I may not have a high paying job in the future,’ or ‘I may not get as much out of my pension.’ There’s been a huge cultural shift.”
Arnold, a past president of the California Assn. of Mortgage Brokers, said the pay-more-now mentality can save homeowner big bucks in the long run.
For example: A loan for an average-priced home financed two years ago, when the interest rate for a 30-year fixed was around 5.25%, yielded a payment of roughly $1,932 per month. But that leaves 28 years left on the mortgage.
Today, that same homeowner could finance into a loan at around the 3.3% at 15 years, yielding a home payment of roughly $2,431 per month.
“The client will pay $499 more per month for 15 years, and that’s about $89,820 over the course of that period,” Arnold said. “But that saves 13 years of payments at $1,932 per month.”
Switching from 30 years to 15 years costs the homeowner $89,000 in the short run, but saves roughly $185,000 on the overall cost of the home mortgage.
Pamela Llanos, branch manager of Premier Home Mortgage’s Aliso Viejo office, said she’s hearing from Orange County residents their prevailing motivation for paying off their mortgages as quickly as possible is much more than just rock-bottom rates.
“The economy, politics war,” Llanos said.
“With these things going on with our country, I think people are paying a lot more attention to where their money is going. People are becoming more aware of where their money’s going and what they are paying. “In the past it was equity, equity, equity, and now it’s payoff, payoff, payoff.”
“Payoff” is word heard quite often by Premier brokers, she said.
“That’s what I hear virtually every time I have people signing,” she said. “That’s the No. 1 thing. ‘I want to pay this off as soon as possible.’” It’s a silver cloud in a housing storm that just won’t seem to clear, and brokers like Arnold are taking it as a good sign for the future.
“I think it’s a positive trend,” he said.
“People are rightsizing their lives more than ever. People are saying ‘If the economy doesn’t turn around, if housing doesn’t turn around, I want my mortgage paid.’ It’s a different tomorrow.”
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