Cash-in Refinancing into a 15 Year Fixed? No Thanks. | Bay Area ...

Last week in Freddie Mac?s weekly mortgage market survey, the 15 year fixed rate mortgage cracked the 3% barrier. Meaning, the average rate on conforming 15 year fixed mortgages fell below 3.000%.

Yes, we are talking about 2.xx% mortgages.

Psychological Tripwire

And as expected, applications for shorter term mortgages are on the rise.

Needless to say, a mortgage with a 2-handle is a pretty nifty concept. There?s no question about the bragging rights here; lock in your rate on a refinance here, and you?ve nailed it at the bottom of the market, at least so far?

Weighing Opportunity Cost

But sometimes the 15 year vs. 30 year mortgage comparison overlooks the effective ?opportunity cost? associated with the shorter term. It?s easy to measure the discounted rate on a 15 year relative to a 30 year: It?s either .125% or .250% or .375% or ___% cheaper. You get a quote, and you compare the two.

The payment on the 15 year loan is going to be higher, despite the discounted rate, simply because you?re agreeing to repay the entire principal in half the time. And that raises a few issues when it comes to budgeting for your monthly housing costs within the scope of your larger, longer-term financial planning.

For starters, the higher payment is going to take away cash-flow from other obligations or objectives. It may affect your ability to buy other real estate, fund a retirement plan, a college tuition, or your monthly sushi bill. Weigh the trade-offs.

Another issue that is common to see today is the ?cash-in? refinance, where a consumer cannot take out a new loan large enough to pay off the existing one. The new terms are attractive enough that, in order to access them, the consumer uses new capital to reduce debt and get over the hump. This is usually forced by low appraisals and loan-to-value restrictions on new loans.

But with so many hot-to-trot for 15 year loans and their higher payment requirements, we are seeing consumers who ?cash-in? so that their monthly payment isn?t too high to qualify for. That?s a sign right there that the 15 year loan may not be the best idea: when you can qualify for the 30 year payment, but not the supposedly-more conservative 15 year payment.

Is it Worth Committing to a Faster Payoff?

Sure, that 2.xx% mortgage number looks pretty appealing. But really, what?s the hurry? When you can borrow money at such levels as we are seeing today, there should be less urgency to pay it back, not more. Is it worth shaving .375% ? or even .750% for that matter ? off your cost of borrowing in exchange for reducing the payback period by half?

I think not. At least not by default. Of course unique circumstances may vary, and this is by no means to be taken as a recommendation. But I can?t help but think that in a few years time, or whenever it is that mortgage rates cross 5%, 6%, 7%, kiss double digits, and then whatever it is they get to when you hear somebody saying ?whip inflation now again?? I can?t help but think that at some point in our future, there will be many who look back and wonder why exactly they didn?t lock in these general price levels for a longer period of time.

What was the hurry?

If you?re interested in seeing the options side-by-side, and discussing the opportunity and associated costs of a 15 or 30 year mortgage, click here for current rates.

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