The New Pick: The Quick-hit Loan Buyers Are Going For 20-, 15-, Even 5-year Mortgages. Payments Are Higher, But Equity Builds Up Faster.

Posted: August 25, 1991

Patty, an accountant, found it easy to "work out a lot of numbers" when she and a friend decided to buy a home near Collegeville, Montgomery County. Patty and her friend checked out the total interest paid for traditional 30- year mortgages and 15-year mortgages, plus a less common type of loan that is paid off in 20 years.

"The difference in total interest was astronomical," she said. "The 15- year had much less interest but was scary because the payments were so high. We worked out the tentative payments for a 20-year loan and found we would still be able to pay off the debt quicker, own sooner and not spend a fortune in interest." Patty and her friend applied for a 20-year mortgage.

Some homeowners who are refinancing also are going for shorter-term loans. Frank Keller, of Audubon, Montgomery County, said he had refinanced his 30- year, 10.5 percent mortgage with a 20-year loan at 8.875 percent.

"Essentially I knocked 6 1/2 years off the mortgage, and it won't cost me a penny," he said. "The monthly payments are within about $3 a month of each other."

According to the Federal National Mortgage Association (Fannie Mae), Patty (who did not want her full name used) and Keller are among an increasing number of home buyers who are choosing alternative short-term mortgages even though interest rates for conventional 30-year mortgages reached a four-year low this summer. As of Aug. 15, 30-year fixed mortgages had an average interest rate of only 9.23 percent in the Philadelphia area, compared with

10.09 percent a year earlier.

Fannie Mae records show that about 30 percent of home buyers nationally obtained a mortgage loan with a term shorter than 30 years in May and June, more than double the percentage 18 months ago. In July, a still-high 27 percent were picking short-terms.

"If anything, the proportion" of those using short-term mortgages "is even higher here," said Ann Logan, senior vice president of Fannie Mae's Northeastern regional office in Philadelphia. "I think because the rates are lower, more buyers can afford the higher payments of short-term mortgages. In this area, buyers are conservative, and fast equity buildup appeals to them."

Fannie Mae, a publicly owned corporation, buys mortgages from lenders and resells them to investors in the secondary market. The process keeps money flowing to lenders, who continue to service the mortgages. About one of every eight mortgages issued goes to Fannie Mae.

The Federal Home Loan Mortgage Corp. (Freddie Mac), another publicly owned corporation that buys mortgages from lenders and sells them to investors, and the Mortgage Bankers Association of America, a trade group, also have reported increasing use of short-term mortgages.

Short-term mortgages "provide enormous benefits to home buyers," said James W. Nelson, the mortgage bankers' president. "All those who are out there looking for a home should also be looking at what options are available to them for financing that home."

Freddie Mac said an increase in the use of 15-year mortgages meant that 91 percent of its loans were of the fixed-rate variety in the first quarter of the year, up from 87 percent in the same quarter a year ago.

The most-popular shorter-term loans currently attracting borrowers are:

FIFTEEN-YEAR MORTGAGES. These have been popular with some buyers for a number of years, and are available from most lenders. The interest rates generally are about one-half percentage point below those of 30-year mortgages. Buyers build equity in their homes at much faster rates and pay much less interest, but monthly payments are sharply higher than those for 30- year loans of the same amounts.

TWENTY-YEAR MORTGAGES. These recently were introduced into the area by Norwest Mortgage Inc., of Des Moines, Iowa, but now are available from a number of other lenders. Peter J. Wissinger, senior vice president of Norwest, calls 20-year loans "a middle-of-the-road option" that can let buyers build equity faster and reduce interest costs with more moderate increases in monthly payments than with 15-year mortgages. These mortgages often have interest rates slightly under 30-year rates, but some lenders offer no rate advantages.

BALLOON MORTGAGES. These generally have terms of five or seven years, but are amortized over 30 years and have payments matching those of 30-year loans. When the balloon terms are up, borrowers must pay off the mortgages or refinance at current interest rates. During the balloon terms, borrowers get fixed rates as much as three-quarters of a percentage point below 30-year fixed rates, resulting in considerably lower monthly payments. Balloons are especially popular with buyers who plan to occupy their homes for only a few years before moving on.

TWO-STEPS. These are a variation of the balloon in which borrowers get lower-than-market interest rates for five or seven years, then go to variable rates for the remaining 25 or 23 years of the terms. The variable rates are linked to an economic index such as interest rates on Treasury securities. As with regular balloon mortgages, the key attraction is the lower, unchanging monthly payments during the first step of the mortgage.

"In effect, short-term mortgages are another way of saving," Logan said. ''The more equity in the home, the more credit can be built. People are saying, 'I want to own my house sooner.' " Logan pointed out that homeowners could use built-up equity to establish credit for home-equity loans, one of the few consumer loans with interest still deductible on federal income-tax returns.

Ron Agasar, senior vice president of American Residential Mortgage Corp. in Cherry Hill, thinks "a combination of issues" is pushing more people toward short-term loans. "Some people are looking to lower their interest payment, some want to get out of debt faster," he said.

Agasar said move-up buyers, going into their second or third homes, were taking most of American Residential's 15-year mortgages. "A lot of move-ups want to have property free and clear by the time they are 65," he said. "The balloons have appeal across the board because of the lower rate; they appeal to both first-timers and move-ups."

Dave Davitch, executive vice president of American Financial Mortgage Corp., of King of Prussia, said, "The move toward shorter-term vehicles is unprecedented in my experience."

Davitch said that two-step loans were the most popular short-term loans with his clients, but that 15-year loans also were moving briskly. American

Financial recently introduced a 20-year mortgage, he said, because "people were asking; we were getting interest."

Patrick Aritz, president of Avstar Mortgage Corp., also of King of Prussia, thinks that increased interest in short-term loans will "automatically happen" when there is a decrease in mortgage rates.

"People start thinking in terms of owning homes sooner," Aritz said. "A lot of people buying now are in a rare combination of rate drop and depreciating capital value of property. They put those two things together and feel they will own sooner." Aritz said balloons and two-steps were the biggest short-term movers at his offices.

Patt Hogg, manager of the Norwest Mortgage office in King of Prussia, said lenders were seeing "a more sophisticated consumer saying, 'How can I

save?' "

Hogg said Norwest was getting a good response to its 20-year mortgage, which recently had an interest rate one-quarter percentage point under that of its 30-year mortgage.

Adjustable-rate mortgages, or ARMs, which many home-financing experts once thought would become the staple of the housing industry, currently represent only about 4 percent of Fannie Mae's business. "After a decade of experience, it seems to be the preference of the community to go with fixed rates," said Alexander N. Saphos, director of sales and marketing for the Northeastern Fannie Mae district.

Logan, of Fannie Mae, thinks that ARMs - whose rates are adjusted periodically (usually once a year) to match an index or financial indicator, such as the interest rate of one-year Treasury securities - will regain some popularity if rates for fixed mortgages go back above 10 percent, where they were for most of the last decade.


American Residential Mortgage Corp., 609-486-1000; American Financial Mortgage Corp., 215-992-0100; Avstar Mortgage Corp., 215-768-7800; Norwest Mortgage Inc., 215-337-4320.


Rates, monthly payments, total interest payments and equity accumulation after seven years, for seven-year balloons and selected fixed-rate mortgages. All loans listed are for $100,000. Total interest is over the life of the loan. With a seven-year balloon, a borrower would have to refinance the balance still due at the end of the seven years.



7-year balloon 8.500% $769 $57,668 $6,921

15-year fixed 8.875 1,007 81,233 30,969

20-year fixed 9.000 900 115,933 17,433

30-year fixed 9.250 823 196,156 6,094


Percentage of loans purchased by the Federal National Mortgage Association (Fannie Mae), by category.



January '90 80% 12% 2% 4% 2%

February 80 12 4 2 1

March 78 13 5 2 2

April 75 13 7 2 2

May 74 12 9 3 2

June 74 11 10 4 2

July 73 9 11 5 2

August 74 9 10 5 2

September 75 10 9 4 2

October 74 11 11 3 1

November 70 12 12 4 1

December 68 12 13 5 1

January '91 67 12 14 6 1

February 68 12 14 5 1

March 67 16 13 4 1

April 66 18 11 3 2

May 66 20 10 3 1

June 65 21 9 3 1

July 67 18 9 4 1

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