Division President of Origination Services
There is a great deal to consider before diving into shifting from a 30-year mortgage to a
15-year mortgage - most notably the current mortgage rates.
Although mortgage rates are up across the board, in the last 18 months the increase for the
15-year is less significant. The 30-year is up from 3.00% in December 2020 to 5.76% as of July 2022, while the 15-year increased from 2.60% to 5.1%.
Buckle up, as the rates are expected to continue their ascent! Rising rates can be attributed to Federal Reserve action that has been motivated by a variety of factors - most notably, the need to tamp inflation. As a result, we are in the midst of the highest rate increase as a percent than I have seen the likes of in my thirty years in the business.
Given the rising interest rates, it’s important to weigh all of the variables involved in wanting to shift from a 30-year to a 15-year - and perhaps consider other options.
Let’s consider a 30-year mortgage holder that was lucky enough to lock in a great rate of 2.5% - and wants to explore a 15-year mortgage to pay off the mortgage sooner. Unfortunately, the best rate available at the moment is in the range of 4%. The math simply doesn’t work in this scenario. Even though you shorten the timeframe on the length of the mortgage, your payments would be much higher based on the 4% rate.
Life events are the biggest driver of refinance decisions at the moment. That could come in the form of divorce, illness, kids heading to college - any situation where extra money is needed and a cash out refinance is needed. This is where home equity lines of credit could be the smarter option.
Because the real estate market value is so high, there is a lot of value in the equity of homes. The nice thing about a home equity loan is that you can control the amount that you want to take out. Depending on your type of loan, you don’t need to pay on it until you draw down on that expense, weighing that against higher home equity rates and other options.
The Lender Perspective
Given this changing economic climate, now is the time for process modernization. Operating efficiently with a primary service provider with powerful tech-enabled solutions allows lenders to take advantage of technology solutions that can’t be consumed in a multiple vendor strategy if all providers don’t have the same capabilities.
Dave’s final word … It’s time to pivot our mindsets in terms of what borrowers need – and how lenders can serve them – given these market conditions.