MORTGAGE After refinancing comes the shock

Proceed with caution before jumping into a 15-year mortgage, experts say.
HARTFORD COURANT
In the mortgage world, it's known as payment shock.
It's the reality that hits when homeowners refinance 30-year mortgages down to 15 years -- and watch their monthly payment balloon.
"It's one thing to see the increased payment on paper. It's another to actually have to pay it," said Michael Menatian, president of Sanborn Corp. in West Hartford, Conn., a mortgage brokerage company.
And it has been happening more frequently in the past two years, as record numbers of homeowners refinance mortgages to shave time and to take advantage of rates that have hit 45-year lows.
Payment shock
Mortgage brokers said that some of their clients who refinance down to a 15-year loan refinance again, within a year, to a 30-year mortgage.
Some homeowners switch back because they want to take cash out of their home to pay for renovations or additions, or to fund a college education, and need to spread the money over 30 years.
But others simply find that the increased payments that come with a 15-year mortgage are too high to handle, mortgage brokers say.
"You have a lot of people who come back and say, 'We qualified initially, but we don't want to make the higher payment anymore,'" said Tim Malburg, president of Capstone Mortgage Co. in Wilton, Conn.
Malburg said one of his clients recently refinanced back up to a 30-year mortgage after six months at a 15-year rate because the client's annual bonus was much smaller than expected and he didn't want to keep paying the higher payments that come with a 15-year loan.
Saved by interest rates
Although a 15-year mortgage can shave tens of thousands of dollars off the overall costs of a mortgage, it comes with a higher monthly payment.
So far, those who have recently made the 15-year loan mistake have been lucky. Mortgage rates in the past year have tended to move downward, not upward, so that homeowners who found themselves refinancing to a longer-term loan after a few months with a 15-year mortgage likely got a similar, or even lower, interest rate and suffered only by paying another round of closing costs.
But brokers warn that clients are not always going to be so fortunate because once homeowners lock into a 15-year loan and rates rise, they pay a higher monthly mortgage when they refinance back to a 30-year loan.
Refinance activity has been so strong in recent months that the Mortgage Bankers Association of America is now forecasting that $3 trillion in mortgages will be written this year, beating last year's record-setting mortgage origination volume by more than half a trillion dollars.
The association estimates that about $1.95 trillion of that total, or 65 percent, will be attributable to mortgage refinancings. The statistics do not break down the number of those opting for 15-year loans vs. 30-year loans.
Heeding caution
Before homeowners jump into a 15-year mortgage, brokers offer a few cautions.
Malburg said he asks clients considering 15-year mortgages a series of questions.
"Are you going to keep the mortgage for 15 years? Are you going to take cash out to do an addition or put in a swimming pool? Are you going to take cash out to pay for college or buy a second home?" he said. "If you say yes, no, no, no, then 15 years is a good buy. But if you have a 15-year-old at home and you haven't saved for college, you might want to go with something else."
Menatian said one way for homeowners to see whether they are ready for a 15-year mortgage -- and the higher payments -- is to send extra money to the mortgage company each month before refinancing.