Question: Do lenders offer mortgages for less than 15 years? We refinanced our 30 year mortgage 6 years ago and switched to a 15 year mortgage. Our current interest rate is 8-3/4%, and we are now thinking about refinancing again. We do not think it makes sense to do so if it means getting a new 15 year mortgage and having to make mortgage payments for an additional 9 years. Do any banks offer 5 or even 7 year mortgages?

Answer: To the best of my knowledge, I have never seen a residential mortgage from a commercial lending institution that is less than 15 years. There are restrictions in the secondary mortgage market on the kinds of loans that can be sold, and thus lenders generally offer only a 15- or a 30-year loan.

I understand your dilemma. You have 9 years to go on your current loan, and if you take out a new 15 year loan, this will extend your monthly payments. And since the ratio between interest payoff and principal payoff is always higher on the interest side for the first several years, you are concerned that you will be paying more interest than principal if you have to refinance for another 15 years.

There is, of course, a simple solution. You can obtain a new (refinanced) loan for 15 or even 30 years that allows prepayments without penalty, and then make larger monthly payments so that you can pay the loan off much earlier. And the interest rate on your new loan will be considerably lower than you are currently paying.

Let me give you an example. You obtain a new loan for $200,000.00 at 7 percent amortized over 15 years. The monthly payment of principal and interest will be $1,797.662. That same loan, amortized over ten years will cost you $2,322,18 a month, and if you wanted to amortize it only over five years, it would cost you $3,960.24 monthly. Clearly, as long as you have the ability to make these extra monthly payments, this may solve your problem -- while at the same time preserving your flexibility. Should you ever need extra money -- or discover a good investment -- you can stop making the additional principal payments and make only the minimum payment which is required under the terms of your promissory note.

As I have written on many occasions, I am usually very much opposed to having a house that is paid in full. There are too many people in this country who are house rich and cash poor. While it is true that you do pay more interest on a longer loan, some of it is deductible. More importantly, however, you might be much better off putting that extra principal into another investment. Thus, when you are at a retirement age, you may have a small mortgage on the books, but you will also have some liquid savings for your personal needs.

This is always a hotly debated issue. There are many readers who have expressed their opinion that it is better to pay the loan in full as soon as possible. For some people, that may very well be true -- and may be in their best interests. Furthermore, with the economy in the situation that it is today, you probably would be well advised to make more substantial payments on your mortgage, since you are paying interest at 7% in my example, and may only be able to get 3% or 4% on your investments if you are lucky.

But what happens if interest rates rise, and you can get 10% on your savings account? While this sounds highly unlikely in todays economic situation, history has demonstrated that this has happened in the past. If you have locked yourself into a short loan arrangement, you must make the required monthly payments. If, on the other hand, you took out a 30-year loan, the monthly payments would be much smaller. You would have complete flexibility, on a month to month basis, as to whether you will make additional payments so as to reduce your mortgage, or take that additional money and invest it wisely elsewhere.

If you do decide to make additional monthly payments so as to curtail your loan on a more rapid basis, then I strongly recommend that you obtain from your lender (or from your computer) an amortization schedule, so that you will know, each and every year, how much interest you have paid and what your current principal balance is.

You should also ask your lender if they accept bi-weekly mortgage payments, instead of only monthly payments. If you make a mortgage payment twice a month, more of your payment will be credited toward principal, and you will (on a yearly basis) be making the equivalent of 13 monthly payments instead of 12. Under this arrangement, your loan will be paid down much faster, and you will end up paying much less interest on your mortgage loan.

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Published: August 20, 2001

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