As more homeowners look to refinance, Wells Fargo (WFC) and JP Morgan Chase (JPM) are seeing surprisingly substantial increases in the origination of 15-year mortgages.
Through November, Wells Fargo saw 15-year mortgage originations increase by 55% from a year earlier.
Although still a small percentage of the overall market, the recent rock-bottom interest rates are leading more homeowners to opt for paying off their mortgage faster even if it means, in many cases, a substantially higher payment.
The report by the Mortgage Bankers Association is playing out almost identically at JP Morgan Chase. 15-year loans at the financial services giant not make up 20% of their refinances, up from 10% a year ago.
“It’s entirely a refinance phenomenon,” says Jay Brinkmann, chief economist of the Mortgage Bankers Association.
The latest research from HSH Associates showed rates on 15-year fixed-rate conforming mortgages averaged 4.46% last week. This is well below their recent high of 5.25% in mid-june. And about half a percentage point higher than the 4.99% rate on a 30-year fixed rate conforming loan.
Whether this trend is sustainable in the long term will be debated for some time. However, a recent Wall Street Journal article illustrates how the economy may be fundamentally changing homeowners attitudes towards their mortgages.
With so much attention being placed on household debt levels, one obvious trend is the move towards shortening rather than extending the length of a mortgage. The WSJ article cites Barry Halligan, a retired municipal employee who now works part-time as a consultant. He found that refinancing to a 15-year fixed rate loan at a rate of 4.375% was over a percentage point below the already low 5.5% rate he received when he refinanced in 2003. So although Halligan will have a higher payment, as he put it, “there’s more going now to principal.”
Others, like Darryl Werner, a physician, see the increase in payments as a better option than putting their money in a savings account or in the stock market. “This way, it’s going to pay my loan down.”
However others, like Lou Barnes, a mortgage banker in Boulder, Colorado note that with rates being so low, paying your mortgage down early is not a wise strategy. Says Barnes, “Over the long term, investments will be higher” than the after-tax cost of the borrowed money.
