Historically low interest rates for fixed-rate mortgages have incited a surge of activity in the 15-year mortgage industry. The lowest mortgage rates in history have prompted consumers to refinance existing mortgages, ultimately shortening the lifetime of their loan terms.
According to data gathered by CoreLogic (provider of financial, property and consumer information), 26 percent of homeowners who refinanced their home during the first two quarters of 2010, opted for a 15-year mortgage loan. This number shows a significant increase in popularity for the mortgage variety. Previous studies conducted by CoreLogic have shown that in 2009 18.5 percent of all borrowers chose shorter length mortgages and that number is double the 9.4 percent of consumers who contracted for 15-year loans in 2007.
History of Mortgages
The word mortgage has been part of the American vocabulary for decades. It is because of the legal documenting promising a property as a security in order to secure a loan that part of the country’s economy is based on homeownership. Prior to the nation jumping on the home loan bandwagon, people have borrowed money to pay for land and property since 1190.
The very first signs of a mortgage can be traced back to the common laws in England during the high Middle Ages. During this time period, there were legal obligations put in place to protect a lender from not getting their investment back. The law provided the lender with a bit of interest in the property of the borrower, similar to the contemporary practice of using a home as collateral in a home purchase.
The loan behavior migrated to America along with immigrants to the land. By the 1900s mortgage loans were a common type of offering although not everyone could qualify to get one.
Mortgage Loans Then and Now
Prior to America's Great Depression mortgage options were limited. The conventional way to finance a home purchase during the time period required a consumer to place of 50 percent deposit on a five year term home loan. During the five year commitment the borrower had to pay back all the money that was loaned plus interest, with the final installment being a balloon payment. If any of that debt was left unpaid, the borrower would have to find another loan opportunity and refinance.
That process stayed intact until Fannie Mae was created to help stabilize the crippled real estate market reeling from the affects of the Great Depression. In 1938 the government created the Federal National Mortgage Association (Fannie Mae) entity to buy up default mortgages from lenders. The move was done to free the financial institutions of their debt and get the back into the business of loaning money to consumers. It worked and the industry eventually evolved into the current system.
Current Mortgage Varietals
While all mortgages are similar in concept, each type has its own terms, length and qualification requirements. Two common types of home loans are either fixed rate mortgages or adjustable rate mortgages (aka ARM).
Fixed rate mortgages are those home loans that lock in an interest rate and payment term for an extended period of time. The most common type of fixed rate mortgage selected is a 30-year mortgages. Fifteen year and even 40-year mortgage plans also exist. Fixed rate mortgages are extremely popular with first time homebuyers, as repayment schedules are predictable. Only those with the best credit history and financial stats can expect to qualify for fixed rate mortgages.
ARMs also come in a variety of lengths, however the interest rate fluctuates and resets during the contracted loan period. Generally, ARM opportunities have promotional interest rates to start and the initial rates are lower than the fixed mortgage rate counterparts. However, overtime the rate will be adjusted in direct correlation with the Prime or Treasury Bill rate. When a new payment amount is greater than the previous it is considered to balloon. ARMs are available both to the most qualified borrowers and their subprime counter parts.
While it may seem incredibly enticing to jump on the 15-year fixed rate bandwagon, the move is not for everyone. Fannie Mae recently reported that the current mortgage rate for this loan type is 3.86 percent. However, those considering refinancing to this length loan must realize that they will have less time to pay off their debt and their mortgage payments might go up as a result.
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