Why You Should Think About a Weird Mortgage

BOSTON (MainStreet) -- Today's record-low interest rates have lots of homeowners debating whether to refinance into 15- or 30-year mortgages, but few realize lenders offer products with all sorts of repayment periods -- from five-year "balloon" mortgages to 29-year loans.

"They're not standard offerings, but they are widely available in the marketplace -- particularly for consumers who are willing to shop around," says Greg McBride of market tracker Bankrate.com.

Mortgages don't have to be 15-years or 30-years. Especially if you're refinancing, you might want five, 29 or anything in between.

Fifteen- and 30-year mortgages do make up the bulk of the market, but the Mortgage Bankers Association says some 15% of consumers who refinanced in May chose nonstandard products -- generally 10- or 20-year loans. About 2% of May homebuyers also chose such loans for purchase mortgages.

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Quicken Loans offers one of the best-known home loans with nonstandard repayment terms -- a heavily advertised product called the "Yourgage."

The Yourgage lets consumers choose anything from eight-year loans to 29-year ones.

"It wasn't that clients were calling us and saying, 'Hey, can you do a 26-year loan?'" Quicken Loans' Bob Walters says. "But we found a lot of people who'd say: 'I got a 5% mortgage rate three years ago and I'd love to refinance to 4.25%, but I don't want to add a new three years to my loan."

Walters says eight-year mortgages are the most popular choice among Yourgage customers, with 29-year loans coming in second.

"You've got two ends of spectrum," he says. "People who take out eight-year loans have typically been in their current mortgage for a few years and want to pay it off quickly. What we tell people about 29-year loans is that they can pay an extra 50 cents a day on a $200,000 loan, pay it off one year earlier than they would with a 30-year mortgage and shave $6,000 to $7,000 of interest off."

McBride says mortgages with nonstandard repayment terms work best for a few specific types of borrowers:

• Buyers or refinancers who are approaching retirement and want to pay off their loans by the time they quit working;
• People buying low-cost properties who don't want to spend 15 or 30 years paying $50,000 or $100,000 back;
• Consumers who want to refinance and lock in today's low rates, but don't want to "reset the clock" -- replace a 15- or 30-year mortgage they've had for several years with a new 15- or 30-year loan.

But he recommends all borrowers looking at nonstandard mortgage terms consider whether they'd do better by simply taking out 30-year loans, paying lower monthly mortgage bills and using the difference for 401(k) contributions or other financial needs.

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"For people who have 'undersaved' for retirement or emergencies, accelerating the repayment of a low-rate, tax-deductible mortgage might be a very low priority," the expert says.

Choosing a nonstandard mortgage term commits you to making higher monthly payments than you'd have with a 30-year loan even if you lose your job or face other setbacks, he adds.

"You want to be very careful about locking yourself into a higher payment that could become untenable in the future," McBride says.

Another alternative is simply taking out a 30-year loan and adding a little extra principal to your bill whenever you want. That doesn't lock you into a higher monthly bill. TheStreet.com and other websites have online calculators that can help you figure out how much to add each month to pay back a loan by a certain date.

Still, McBride says an eight-, 13- or 27-year mortgage can work well for certain consumers -- it all depends on the specific situation.

"There's a reason they call it 'personal finance,'" he says. "The right answer for you will depend on your personal circumstances."