By Cheryl Tay:
Despite lower mortgage rates, some borrowers in the US are reducing their interest rates further by turning to loans with shorter tenures, or taking out “hybrid” adjustable-rate mortgages (ARM), reported The Wall Street Journal.
According to the biggest mortgage lender in the US, Wells Fargo, 25 percent of its clients opted for 15-year loans. At the same time, Freddie Mac’s borrowers prefer shorter-term loans when they remortgage, with most taking out a 15-year loan.
“You can save as much as three-quarters of a percentage point by going with a 15-year term as opposed to a 30-year term,” said Frank Nothaft, Chief Economist at Freddie Mac.
Shorter-term mortgages are particularly sought-after by people “who have been homeowners for a number of years…or who want the security of knowing they will own their home free and clear when they retire,” added Nothaft.
Research firm HSH.com also noted that the 2.99 percent average rate for 15-year fixed loans is uch lower than the 3.47 percent average rate for 30-year fixed mortgages.
Moreover, opting for a shorter-term loan significantly decreases overall interest charges. For example, a 2.92 percent US$350,000 (S$428,049) loan with a tenure of 15 years will incur interest charges amounting to US$82,646 (S$101,076), while its 30-year counterpart comes with a 3.57 percent rate, or an overall interest charge of US$220,730 (S$269,952).
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