Today's record-low interest rates have lots of homeowners debating whether to refinance into 15- or 30-year mortgages, but few realize lenders offer products with all sorts of repayment periods -- from five-year "balloon" mortgages to 29-year loans.
"They're not standard offerings, but they are widely available in the marketplace -- particularly for consumers who are willing to shop around," says Greg McBride of market tracker Bankrate.com.
Fifteen- and 30-year mortgages do make up the bulk of the market, but the Mortgage Bankers Association says some 15% of consumers who refinanced in May chose nonstandard products -- generally 10- or 20-year loans. About 2% of May homebuyers also chose such loans for purchase mortgages.
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Quicken Loans offers one of the best-known home loans with nonstandard repayment terms -- a heavily advertised product called the "Yourgage."
The Yourgage lets consumers choose anything from eight-year loans to 29-year ones.
"It wasn't that clients were calling us and saying, 'Hey, can you do a 26-year loan?'" Quicken Loans' Bob Walters says. "But we found a lot of people who'd say: 'I got a 5% mortgage rate three years ago and I'd love to refinance to 4.25%, but I don't want to add a new three years to my loan."
Walters says eight-year mortgages are the most popular choice among Yourgage customers, with 29-year loans coming in second.
"You've got two ends of spectrum," he says. "People who take out eight-year loans have typically been in their current mortgage for a few years and want to pay it off quickly. What we tell people about 29-year loans is that they can pay an extra 50 cents a day on a $200,000 loan, pay it off one year earlier than they would with a 30-year mortgage and shave $6,000 to $7,000 of interest off."
McBride says mortgages with nonstandard repayment terms work best for a few specific types of borrowers:
- Buyers or refinancers who are approaching retirement and want to pay off their loans by the time they quit working;
- People buying low-cost properties who don't want to spend 15 or 30 years paying $50,000 or $100,000 back;
- Consumers who want to refinance and lock in today's low rates, but don't want to "reset the clock" -- replace a 15- or 30-year mortgage they've had for several years with a new 15- or 30-year loan.
[Think the time is right to refinance? Click for rates from multiple lenders.]
But he recommends all borrowers looking at nonstandard mortgage terms consider whether they'd do better by simply taking out 30-year loans, paying lower monthly mortgage bills and using the difference for 401(k) contributions or other financial needs.
"For people who have 'undersaved' for retirement or emergencies, accelerating the repayment of a low-rate, tax-deductible mortgage might be a very low priority," the expert says.
Choosing a nonstandard mortgage term commits you to making higher monthly payments than you'd have with a 30-year loan even if you lose your job or face other setbacks, he adds.
"You want to be very careful about locking yourself into a higher payment that could become untenable in the future," McBride says.
Another alternative is simply taking out a 30-year loan and adding a little extra principal to your bill whenever you want. That doesn't lock you into a higher monthly bill. TheStreet.com and other websites have that can help you figure out how much to add each month to pay back a loan by a certain date.
Still, McBride says an eight-, 13- or 27-year mortgage can work well for certain consumers -- it all depends on the specific situation.
"There's a reason they call it 'personal finance,'" he says. "The right answer for you will depend on your personal circumstances."
- Quicken Loans