The sluggish economy and low mortgage rates have combined to spawn a trend of mortgage borrowers who are turning in 15-year mortgages for longer 30-year mortgages.

The longer, 30-year mortgages are more expensive over time, but come with lower monthly payments to help see home owners through economic hard times on a month-to-month basis.

It's part of a larger trend of cash-strapped consumers looking at mortgage options for a financial bail out at home.

"I am doing very few 15-year mortgages at the moment," said Joette Joseph, vice president and branch manager of Alliance Title's main branch in San Jose.

In good times, consumers typically do the opposite and trade in 30-year mortgages for shorter term 15-year mortgages. Fifteen year mortgages come with higher monthly payments, but greater savings over time due to the lower interest rate and shorter term.

In early May, Freddie Mac reported the average fixed interest rate was 5.70 percent for 30-year mortgages, but only 5.03 percent for a 15-year loan.

The mortgage payment (principal and interest) on a $250,000 loan at 5.70 percent would be about $1,451 a month. The same loan with a 15-year mortgage at 5.03 percent would be approximately $1,980 -- a difference of $529 a month.

That's quite a chunk of change employment-challenged home owners can use to weather the current economic storm.

"For people who are living on the edge, I can see the benefit of going the other way. There is little difference these days in a 30-year rate-verses-a 15-year rate, probably 0.50 to 0.75 of a percent, so why not just get a 30-year mortgage and make the payment as if it was a 15, knowing that, if times get tough, you can voluntarily drop to the lower payment without penalty," said Jim Paulson, a real estate agent with RE/MAX West in Boise, ID.

The 30-year loan would cost about $272,360 in interest over the life of loan. A 15-year loan, for the same amount, would cost only about $106,560 in interest over the life of loan.

"If they come into some sort of disaster they have a lower payment. When you have a disaster, it's too late to refinance. A lot of people realize the rates are so low and then they realize that the mortgage is their last tax deduction and maybe paying off the mortgage isn't the best use of the money," said Karen Tima, vice president and manager of the real estate department at Farmers and Merchants State Bank in Boise.

Tima said home owners could invest the savings of hundreds of dollars a month, even in money market or mutual funds, which aren't performing well now, but low prices offer an investment bargain that can help create a nest egg for the future.

"Buy low, sell high, instead of paying off the mortgage," Tima said.

Consumers are finding financial cushions elsewhere in their home mortgage.

Reverse mortgages also are gaining popularity at Farmers. The mortgages allow qualified borrowers to use equity cash now, but not pay anything on the loan until the home is sold.

"Consumer confidence seems to be very low. Even those who have good income now are worried that it might not last. Also, there are many households that were previously two-income and are now trying to get by on one paycheck. I am seeing lots of piggyback equity lines for the same reason. The lenders are really pushing the idea that you can't wait until you need the money to ask for it," Joette added.

Published: May 19, 2003

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.