NEW YORK (MainStreet) – American homeowners are increasingly opting for a type of mortgage that until recently was more or less unknown: the “oddball” loan with a term like 12, 17 or 24 years, instead of the standard 15, 20 or 30, customized to fit a person's individual housing situation.
But is it worth the effort to hunt down or negotiate one of these atypical deals?
It can be, but only if conditions are just right. The New York Times, citing recent data from the Mortgage Bankers Association, reports that the “other length” category made up an unusually high 20% of loans approved for refinancing in August through October, up from 17% the year before.
This type of loan is more common in refinancing than with original loans because many refinancers like to match the new loan’s term to the time remaining from the original loan. A homeowner with 22 years left on a 30-year loan might not realize any savings by taking out a new 30-year mortgage, even if the interest rate were lower, because the new loan would require eight extra years of payments. The oddball loan solves that problem.
But there is another option: Refinance to a 30-year loan and then make extra principal payments to retire the debt in 22 years, eliminating those eight years of interest payments while sticking with a more conventional loan. Two factors determine which option is better.
First, will the oddball loan get you a lower interest rate? Generally, the shorter the loan term, the lower the rate, because the lender does not tie money up for so long. According to the BankingMyWay rate survey, the average 30-year loan currently charges about 4.2%, compared to 3.4% on the 15-year loan. Many 20-year loans charge about 3.5%.