As shown in the two graphs above, 15-year mortgages now make up a much smaller percentage of fixed-rate loans in Massachusetts than in past years. The percent of 15-year mortgage originations compared with 30-year mortgages has dropped each year between 2002 and 2006.
o Statistics for fixed-rate mortgages in Massachusetts
o Source: LoanPerformance

Some lenders are expressing astonishment at a sharp decline in the popularity of 15-year mortgages while others point to the trend as yet another example of how rapidly the lending marketplace is changing.

In Massachusetts, fewer than 10 percent of fixed-rate mortgage borrowers are opting for 15-year loans. The other 90-plus percent are taking out 30-year fixed-rate mortgages, according to statistics by San Francisco-based LoanPerformance, a subsidiary of First American Real Estate Solutions that tracks and monitors mortgage trends.

Massachusetts borrowers are even less likely to opt for 15-year mortgages than their counterparts in other states, with about 12 percent of borrowers across the country still selecting the shorter-term fixed-rate loans.

However, 15-year mortgages were in far greater demand in years past both nationally and locally. In 2002 about 44 percent of Bay State borrowers selecting fixed-rate home loans took advantage of the lower interest rates associated with 15-year mortgages, and 40 percent of borrowers did the same nationwide. The percentage of 15-year home loan originations in comparison with 30-year loans has fallen nationally and in Massachusetts each year since 2002.

“What I would say is that the 15-year fixed mortgage is very cyclical and appears to be tied to low interest-rate environments where borrowers who are probably not planning on moving and who are interested in paying down their mortgages more quickly will promptly take advantage of low interest rates,” said Bob Visini, vice president of marketing for LoanPerformance. “The important issue here is affordability. The borrower must feel comfortable that they will be able to afford the [monthly] payments which are substantially higher than the traditional 30-year payment.”

He said people who did lock into the low 15-year mortgage rates just a few years back during the refinancing boom were lucky, since the lending scene and is much different now, with interest rates ticking steadily higher.

Part of the decline in 15-year mortgages may be attributable to the end of the refinance boom, since borrowers refinancing a loan mid-way through its term are among the most likely to select a shorter-length new loan rather than resetting the clock at 30 years.

While 15-year mortgages offer lower rates than 30-year fixed-rate loans, there are also a growing number of adjustable-rate and interest-only loan products available, grabbing the attention of borrowers and giving them a wide variety of options. The lower initial rates of those loans have the advantage of not substantially increasing monthly payments, however, and the popularity of 15-year mortgages has plummeted as a consequence.

According to Visini, there is about a 60 percent to 40 percent split between the number of fixed-rate and adjustable-rate loans issued nationwide, with fixed-rate mortgages still maintaining a slight lead. However, borrowers are opting for longer loan terms far more frequently than they did just a few years ago. Prior to 2000, 15-year mortgages were issued in numbers almost equal to 30-year fixed-rate mortgages.

Of the fixed-rate mortgages currently held by Massachusetts borrowers, 68.16 percent are 30-year fixed-rate loans and 31.84 percent are 15-year mortgages, but the gap is widening.

For the most part, industry watchers contacted by Banker & Tradesman cited similar reason for the rapid decline in 15-year mortgage originations.

“I think the first thing it says about the market is the cost of real estate has gone up,” said James Dougherty, executive director of the Massachusetts Mortgage Association. “Given the choice, people would prefer the shorter term to build equity faster, but whether [15-year loans make sense in a certain] economic and real estate environment as an instrument is another story.”

Dougherty also said the mindset of home shoppers has evolved over the past two decades. Staying in the same house and owning it outright often are not top priorities with the new generation of borrowers.

“I think people are opting for larger houses, not shorter [loan] terms, if they can afford it,” he said. Stretching to buy more expensive homes often places an emphasis on finding the lowest possible monthly loan payment, which has ruled out 15-year loans for many borrowers.

Charlie Nilsen, New England regional manager at JP Morgan Chase in Braintree, said the ideals of borrowers have definitely taken a new direction. He said consumers enjoy the flexibility that comes with other loan products where less money can be put down. And having a mortgage has become a way of life for many people are willing to accept. For a growing number of borrowers, it is no longer a priority to pay off a loan as fast as you can, he said.

“It’s just people are avoiding [15-year fixed mortgages] now and opting for more flexibility,” he said.

Also, there are a many first-time homebuyers in the market for houses right now, Nilsen said, and most are not likely to be attracted to 15-year mortgages, which are more suited to buyers carrying equity from a previous home sale into another purchase.

“We are all seeing more and more buyers entering the market for the first time with limited down payments. [A 15-year mortgage] is the last product they are considering,” said Nilsen.

A New Phase
Eric Nelson, president of Milford-based United Funding Corp., said he was initially surprised to hear 15-year mortgages are being used so seldom. But then he said he could not remember the last time a borrower came to him for a 15-year fixed-rate home loan.

“It’s definitely an eye-opener. It’s been a long time since someone asked me for a 15-year fixed,” said Nelson.

Nelson said he believes there is always going to be a portion of the population that does want to pay off a mortgage more quickly and that will be attracted to the lower interest rates of shorter-term loans. However, such borrowers must have the cash flow to afford the higher monthly payments of a 15-year mortgage. While demand for 15-year loans is unlikely to disappear altogether, Nelson said he thinks the 15-year mortgage could become even less popular with borrowers than it already is.

“Can it grow less popular? Yeah I think it can grow less. Let’s face it, today when people are buying homes they are choosing options that don’t pay off the terms as fast,” said Nelson. “It all comes down to affordability.”

Jim Jones, founder and president of First Wellesley Consulting Group, a management consulting firm specializing in the financial services and real estate finance industries, said he thought New England had traditionally been a good market for the 15-year fixed-rate mortgage. New England borrowers are still thought to be more conservative than borrowers in other parts of the country, and so more likely to want to own their homes outright.

“I am surprised that the 15-year fixed-rate market share is at 9 percent,” he said.

However, the introduction of new loan products has pulled people away from the traditional fixed-rate loans, Jones noted. He said the statistics illustrate a new phase for the mortgage industry where there are numerous choices for borrowers. He also said interest rates do play a role in how attractive certain products are at certain times. Just like the real estate market, the mortgage industry goes through cycles.

“Literally, customers will abandon certain products based on where they are in the cycle. I think what consumers do is they always make the best choice for them. Consumers think about ‘how well does this product help me achieve my housing goals,'” said Jones.

“I don’t believe that the 15-year product is going to be sidelined permanently,” he said.

John Battaglia, president of the Boston-based Cambridge Mortgage Group and chairman of the Massachusetts Mortgage Bankers Association, said he does not anticipate that lenders will stop offering 15-year mortgages despite the sharp drop in use of the product, and demand may increase at some point. However, if 15-year mortgages do make a comeback, they are unlikely to recover to the number of origination realized in the past, he said.

Sushil Tuli, president of Leader Bank and Leader Mortgage in Arlington, said the mortgage industry has shifted away from a refinance market and into a purchase market.

“It’s not the right time for the 15-year mortgage,” he said, adding that lenders are no longer advertising the 15-year fixed-rate mortgage the way many had been at the height of its use.

Tuli also said there is more than a 25 percent difference in the monthly payments between 30- and 15-year loans. Currently, with a 15-year fixed-rate loan, borrowers with a $300,000 mortgage would typically pay about $675 per month more than with a 30-year fixed-rate loan, he said.

“That’s a significant difference. We will see more of a decline [in 15-year mortgage originations] as rates go up,” he said.

Should interest rates drop sometime in the future, use of 15-year mortgages may increase, Tuli said.

“The real estate market is cyclical and revisits its past,” agreed Dougherty.