When interest rates fell earlier this year, Barbara Forant wanted to refinance the mortgage on her Lowell condo to lower the rate and pay it off sooner. But she couldn’t find a lender willing to refinance a balance of just $63,000 and shorten the term from the remaining 15 years.
Then her financial adviser suggested a customized mortgage that lets homeowners choose the length of time for repayment, rather than standard terms of 10, 15, 20, and 30 years. In just over a month, Forant was the proud borrower on an 11-year mortgage at 3.99 percent, substantially lower than the 5.75 percent she had been paying.
“It was all effortless. I didn’t have much to think about,” said Forant, 67, a former IBM administrator and legal secretary. “I’m retired now, and the mortgage is my biggest monthly expense.”
With rock-bottom interest rates driving a boom in refinancing — applications recently hit the highest level in 3½ years nationally — many lenders are offering customized mortgages to attract borrowers, like Forant, who have excellent credit. Some, like Quicken Loans, the online lender that refinanced Forant’s mortgage, are aggressively marketing their customized products. Quicken calls it a “YOURgage.”
Other lenders don’t market a specific product, but will customize the length of a mortgage at a customer’s request.
Financial specialists, however, warn that customized mortgages might not be right for everyone. As with all financial products, they say, it’s important to understand how they work and whether the products suit your personal circumstances.
How they work
The most prominent provider of customized mortgages is Quicken. Under a YOURgage, introduced last year, customers can choose any repayment term from 8 to 30 years.
“There’s nothing unusual about the loan other than the term is different. It’s still a fixed-rate loan. There’s no balloon. There’s no reset,” said Bob Walters, chief economist at Quicken Loans in Detroit. “Not everybody’s life is exactly the same; people have different objectives.”
Rates on the YOURgage mirror the closest standard mortgage, with a 29-year loan carrying similar rates to the 30-year. As with most mortgages, the longer the term, the higher the rate. But Quicken adds no extra costs or fees to a YOURgage compared with a typical mortgage, Walters said.
The most popular YOURgage is the 8-year, because refinancing homeowners in their 40s or 50s like knowing the loan will be paid off by 2020, Walters said. The second most popular term is 29 years, which forces homeowners to put a smidge more toward home equity.
About 15 to 20 percent of Quicken’s conventional, nongovernmental loans now fall into the YOURgage category, representing more than $10 billion of the nearly $70 billion in mortgages the company expects to lend this year.
One side benefit of the YOURgage is it makes it easier to compare the cost of refinancing. For instance, if you have 23 years remaining on your loan and are refinancing into a 30-year mortgage, your monthly payment may fall but you’ll be making seven more years of payments.
If you can compare 23 years with 23 years, it’s easier to see whether lower interest payments outweigh the closing and transaction costs.
Are they right for you?
Whether you are considering a customized mortgage from Quicken or other lenders, ask the same questions as in any mortgage transaction.
A custom mortgage is ‘ideal for a homeowner who has trouble budgeting and saving.’
“What is the interest rate? What are the closing costs? And what is the resulting payment?” said John H. LeBlanc, principal at Modera Wealth Management in Boston.
Often, homeowners pick a mortgage term that would end payments before a major life event, such as retirement or a child entering college. But you also want to consider whether a shorter repayment schedule — and higher monthly payment — would pose difficulties in the event of job loss, pay cut, or catastrophic illness.
“I am not a fan of customized mortgages,” said R. Alan Dossett, a financial adviser in Southborough. “An accelerated payment term can lock a homeowner into a high payment that might be hard to meet if they lose their job or have unexpected expenses due to health care, family, etc.”
Make your own customized mortgage
After all, you can shorten the term of your mortgage on your own by making extra principal payments. With an online calculator, or help from a financial professional, you can determine the additional monthly payment to achieve the payoff date you desire.
You can do the same with refinancing, taking a 15-year mortgage, for example, but paying it off at a 10-, 11-, or 12-year rate. If you suffer a job loss or other setback, you have the option of forgoing the extra principal and making a lower payment.
“The total difference in interest is minimal,” Dossett said, “but the homeowner has a lot more flexibility.”
That flexibility also could allow sophisticated homeowners to make extra payments while interest rates are low, but stop when rates rise, perhaps putting that money into better-paying investments, Grant suggested.
But if you don’t have the financial discipline to make extra payments on your own, a custom mortgage can provide the structure to pay the loan a few years early — and save thousands of dollars in interest.
“For the financially savvy homeowner, the YOURgage is likely a poor option,” said Sammy J. Grant, a financial planner and certified public accountant in Atlanta. However, it’s “ideal for a homeowner who has trouble budgeting and saving.”
Another factor to consider: Do you really want to pay off your mortgage? Even in retirement, you pay income taxes, and you can’t take the mortgage deduction if you own your home free and clear.
From taxes to savings to just plain comfort levels, borrowers’ financial goals and circumstances differ, financial professionals said. And those circumstances will determine whether customized mortgages are the right choice.
“You have to look at the cash-flow requirements to make sure it fits within your budget,” said George S. Middleton, a financial adviser based in Vancouver, Wash. “Depending on the fees, it’s beautiful not being locked into only 15 or 30 years.”Katherine Reynolds Lewis can be reached at Katherine@KatherineRLewis.com.