Homeowners Refinancing to 15-Year Loans are Building Equity Faster

While millions of U.S. homeowners have negotiated lower monthly mortgage payments in an effort to avoid foreclosure, there are a growing number of homeowners who are actually choosing to increase their monthly mortgage payment. “Equity Builders” are creditworthy homeowners who have opted to refinance to a shorter term loan, taking advantage of record low interest rates, and as a result are building up their home equity faster.

“They are people who -- rather than waiting for home values to rise -- are taking matters into their own hands,” according to Stuart Feldstein, president of SMR Research Corp., a market-research firm, “They are building equity on their own.”

The rationale for equity building when foreclosure isn’t a threat is simple. The future interest payments homeowners can forgo by reducing the length of their loan is greater than what they’d otherwise earn in safe investments such as a bank account or money-market fund, according to SMR’s Feldstein.

With the 15-year fixed mortgage at record low rates, switching to a 15-year term has become more appealing to middle-age borrowers who can afford higher payments. In January, the portion of refinancing borrowers who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic Inc. a real estate information firm. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009.

Falling home prices have reduced the average homeowner’s equity to 38 percent of their property value, in the first quarter of this year close, to the lowest level since World War II, according to a June report by the Federal Reserve. More than 28 percent of homeowners owe more than their properties are worth according to real estate data company Zillow Inc.