Loans of 30 years and 15 years have become the standards for fixed-rate mortgages, but an official of one of the nation`s largest lending firms says scarce 20-year mortgages make the most sense for many buyers.
Peter J. Wissinger, senior vice president of Norwest Mortgage Inc., of Des Moines, said a 20-year loan offered a ”middle-of-the-road option” with some unique advantages. Wissinger said Norwest is getting a good reaction to a 20-year loan it calls the Roaring 20. ”We were the first to come out with it, but I expect other lenders to pick it up,” he said.
Wissinger said the 20-year term shares some of the advantages of a 15-year term over the standard 30-year, but does it with ”much less payment shock to the borrower.”
Fifteen-year mortgages have become popular in recent years because they greatly reduce total interest paid to the lender and the buyer builds equity in the home much faster than with a 30-year loan. Users of 15-year mortgages also get a significant break on the interest rate. The average rate for 15-year loans in the Philadelphia area recently was 0.3 percentage point below the average rate for 30-year loans.
Disadvantages of a 15-year mortgage to the borrower include a sharp increase in monthly payments. Users of short-term mortgages also lose some buying power because the amount they can borrow is reduced.
Wissinger said the Roaring 20 eliminates much of the payment sting while sharply boosting short-term equity buildup, cutting total interest paid and causing less loss of buying power. It also offers a break on the interest rate. Norwest`s King of Prussia, Pa., office recently quoted a 9 3/8 percent rate for the Roaring 20, compared with 9 1/2 for its 30-year mortgage and 9 1/4 for a 15-year loan. Each of the loans had a 3 point upfront fee (each point equals one percent of the loan).
The monthly payments for principal and interest on a $100,000 loan at 9 3/8 percent amount to $832 for a 30-year mortgage, $924 for the Roaring 20 and $1,037 for a 15-year mortgage.
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