Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, February 6, 1994                   TAG: 9402070277
SECTION: HOMES                    PAGE: D-15   EDITION: METRO 
SOURCE: KELLY BARRON ORANGE COUNTY REGISTER
DATELINE:                                 LENGTH: Medium

15-YEAR LOANS POPULAR, BUT AREN'T FOR EVERYONE

Historically low mortgage rates have made shorter-term loans, which usually come with higher monthly payments, far more attractive. So much so that the Federal National Mortgage Association says fixed-rate, 15-year mortgages accounted for nearly a third of its business last year, up from 18.3 percent in 1991.

But before you buy into the idea that owning a home sooner is a good financial bet, think again. Because for homeowners, debt may not be such a bad thing - despite its tarnished image.

Paul and Kathleen Ackerman, for example, thought a 15-year home loan would be a good way to ensure a comfortable retirement. Ackerman, 54, didn't want to be saddled with house payments when he retired from Plastic Tops Inc., a La Habra, Calif., company he partly owns. But as Plastic Tops' business slumped under the weight of the recession, Ackerman's 15-year mortgage payments became "uncomfortably high," he said. The couple refinanced into a 30-year home loan that slashed their monthly payments nearly $1,000.

The Ackermans' experience underscores one of the potential downsides to 15-year home loans: poor cash flow.

Shorter-term loans offer lower rates than 30-year loans, but because the life of the loan is cut in half, monthly payments are higher. At a 6.5 percent interest rate, for example, an average 15-year home loan in Orange County carries a monthly principal and interest payment of $1,769, compared with $1,368 for an average 30-year home loan at 7.125 percent.

Also, on the 30-year home loan, tax deductions provide additional savings. In the first year of the 30-year loan, for example, you would have $507 more in tax deductions than you would on the 15-year loan.

Those gaps in savings are why many mortgage lenders and financial planners give 15-year home loans qualified recommendations.

"I give clients a little warning, and that is that when you pay off your loan and you have the house, you may not have the cash reserves," said Skip Schenker of National Pacific Mortgage in Orange, Calif.

"To be house rich and cash poor is tragic," said Daralee Barbera, division manager for Waddell & Reed, a financial planning company in Irvine, Calif.

Barbera favors paying less each month on a mortgage and diversifying extra cash into investments that provide good returns and greater financial flexibility.

Take the $401 difference between the 15-year and 30-year monthly mortgage payments cited above. If you're disciplined enough to invest that money, along with savings from tax deductions, into a blue-chip stock fund earning an after-tax annual return of 7 percent, it would grow to about $170,000 over a 15-year period, said John Greer, a mortgage broker with Emery Financial Inc. in Newport Beach, Calif.

With that amount of money you could send your kids to college or buy a second home. You could even pay off the remaining $150,000 principal and interest on your 30-year loan and still have $20,000 left.

If you had opted for the 15-year loan you would own your home, but you would not have any additional money to play with.

Here's more to chew on. At today's low rates, monthly mortgage payments for 30-year home loans can be whittled down so they won't be such a financial burden after retirement, financial planners say. Also, if your home appreciates over time, you will reap the benefit of that gain whether you own it outright or hold a loan on it.

So when is a 15-year home loan beneficial?

"It's more of an emotional and psychological decision for most people," Greer said. For many, there is comfort in home-ownership - even with higher payments and fewer returns.

Roger Williamson, a mortgage broker with Kent Mortgage Corp., believes homeowners who have paid off a sizable amount of their existing loan or are assured of increasing incomes are the best candidates for shorter-term loans.

Obviously, if you're concerned that higher monthly mortgage payments will hamper your cash flow, you shouldn't consider it at all.

But that doesn't mean you can't shorten the term of a 30-year loan. Most loans nowadays don't have prepayment penalties.

So if you're worried that having debt will make you unfashionable in the frugal 1990s, follow this advice: save.