PARAMOUNT MORTGAGE - LENDER'S BLOG

As mortgage interest rates continue to slide to all-time lows, home buyers and home owners are saving thousands of dollars by shortening the terms of their loans.

In the first quarter of 2011, 34% of refinancers switched to a 20- or 15-year loan, the highest level in seven years, according to mortgage giant Freddie Mac.

The national average interest rate for a 30-year, fixed-rate mortgage was 4.32% last week. That is close to a record low according to data collected by Freddie Mac. If a borrower factors in the tax deduction for mortgage interest, that is really cheap money.

Home buyers today have a wide variety of options to pay off their mortgage in record time including 10-, 15- and 20-year fixed-rate terms at historically low interest rates below 4.0%. Borrowers in search of the lowest rates can select a conventional 5/1 ARM for as little as 3.0% or the 7-year ARM around 3.125%.

Shorter term financing increases a borrower’s monthly payment, which some financial planners discourage. They might argue that you’re better off keeping your payments as low as possible — which usually means sticking with a 30-year mortgage — and investing the balance.

The counter argument is that these days, “the investment alternatives to paying down your mortgage aren’t very appealing,” says Keith Gumbinger, vice president of HSH Associates, a mortgage research firm.

“You need a strong stomach and a long-term horizon to invest in the stock market. Interest rates from certificates of deposit, savings accounts, and Treasury securities are microscopic and will likely stay that way for months,” says Gumbinger.

By contrast, reducing the term of your mortgage could save you “tens or even hundreds of thousands of dollars in interest costs,” Gumbinger says. “Because rates on 15-year mortgages are so low, some borrowers may be able to refinance to a shorter term without increasing monthly payments,” he says.

The average rate for a 15-year mortgage was 3.5% last week, according to Freddie Mac. If you’ve got a 30-year mortgage with a rate of 6% or more, refinancing to a 15-year mortgage could lower your monthly payment.

Some home owners opt to make extra payments on their existing mortgage. Even a small increase could save thousands of dollars in interest.

Another option is to pay down principal when you refinance. More than a quarter of borrowers who refinanced in the second quarter of this year paid cash as part of the deal, according to Freddie Mac.