While 30-year mortgages are the most popular, they do have several drawbacks that make them unattractive to some buyers. First, because the loan is financed for such a long time, borrowers end up paying a significant amount of interest. Second, many who take out a 30-year loan feel like they will be paying on their home for the rest of their lives, a commitment that many may feel is just too much.
During the past quarter of 2016, over 30% of refinance applications were to change from a 30-year loan to a 15-year one. There are several reasons borrowers find this shorter loan appealing:
-They can afford to make higher mortgage payments and would like to pay off their loan quicker.
-They want to reduce the amount of interest they pay on their loan. Those with large mortgages and higher interest rates can save a large amount by reducing the term of the loan.
-They are older homeowners who do not want to go into retirement saddled with mortgage debt. The fixed income of a retiree can be ill equipped to handle a mortgage payment in addition to other expenses.
Changing to a shorter mortgage does have risks. While the monthly payment may not double, it will increase substantially. Those who become unemployed or experience some other loss of income may find it difficult to make this higher mortgage payment.