With mortgage rates at or near record lows, many homeowners are contemplating a refinance. Most assume a standard loan is their only option, but that's not always the case. Nontraditional loan products -- fixed rate mortgages with shorter repayment terms -- are also available.
"The big upside [to a nontraditional mortgage] is paying off the loan in the same number of years," says Joe Caltabiano, senior vice president at Guaranteed Rate. "Many people have said, 'Okay, I plan on working until I'm 65 and took this loan out when I'm 45, I want to stay on the same schedule.' This type of loan lets them do that."
Nontraditional loans allow homeowners to refinance and lock in record-low rates while paying off their loan in the same amount of time. Instead of homeowners replacing the 30-year mortgage they've been paying on for five years with a new 30-year loan, they can instead take out a 20- or 25-year mortgage and have their home paid off by the time they retire, or when their child is ready for college.
But don't be fooled by the customizable loan terms. Refinancing into an 8-year loan might sound like a great idea, but it's not always worth it. That lower amortization period comes at a price. With a nontraditional loan term, interest rates may be higher.
"The rates get better as you go down into a 'normal' term," Caltabiano says.
In addition to a higher interest rate, monthly payments tend to be higher on loans with nonstandard repayment terms because the loan amount is amortized over a shorter period of time. Those bigger payments mean shorter loan terms and less interest, but they also mean stretching the budget.
And if the bigger monthly payments are too much to handle, it's a slippery slope into mortgage default.
Dick Lepre, a San Francisco-based senior loan officer with Residential Pacific Mortgage, says these "weird" loans aren't always priced right. "There are 10- and 20-year loans, but there are so few of them that there isn't significant demand for them so they tend not to be priced as they should be. Pricing tends to vary more from day-to-day because the demand for these loans is limited."
If you want to refinance but don't want to add time to your loan, shop around - the same way you (hopefully) did when you took out your mortgage. You don't have to stick with your original bank, so compare rates and closing costs from a few different lenders before deciding.
Instead of choosing a loan with a nontraditional repayment term, consider moving from a 30-year fixed rate mortgage down to a 15-year fixed.
"The biggest drop in interest is a 30-year fixed down to a 15-year fixed, usually half a percent," Caltabiano says. He notes that banks like 15-year mortgages too, because you're paying so much towards principal that you're less likely to default.
No matter what loan term you choose, your credit score will play a factor. Make sure you're getting the best interest rate on your loan by improving your credit score before applying for the loan. A score of 740 or higher will get you the best rates.
Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.