More Borrowers Opt for
15-Year Mortgages

Long considered a fringe character in the mortgage scene, the 15-year loan is now riding a wave of popularity.

As a result of super low interest rates, many borrowers are opting for the deal that allows them to pay off their mortgages in half as much time as the traditional 30-year mortgage.

According to recently published data that doesn’t include refinancings, nearly 16% of the fixed-rate mortgages that lenders sold to Freddie Mac during the third quarter were 15-year loans, up from almost 10% a year prior. And 15-year mortgages accounted for nearly a third of refinanced loans during the first seven months of this year, according to the latest data by CoreLogic. The figure has been climbing since 2007, when they made up just 8.5% of refinancings.

The 30-year mortgage became the standard in lending because its lower monthly payments made real estate affordable to more Americans. While the 30-year remains king, the gap between the two loans’ popularity is shrinking. “The 15-year loan has gone from really being almost a non-issue item to a new trend,” says Stu Feldstein, president at SMR Research, which tracks mortgage data.

The key to the shift is lower interest rates, which makes it easier for borrowers to manage payments on 15-year loans—and still pay off their notes in half the time. Fixed rates on 15-year mortgages average 2.81%, down from 3.36% a year ago and 5.85% in mid-December 2007, according to mortgage-information website HSH.com.

The 15-year loans are also a lot cheaper than 30-year fixed-rate mortgages, which average 3.44%. That 0.63-percentage-point spread is wide compared with historical figures. Before the housing crisis, 15-year fixed-rate mortgages were typically just 0.25 to 0.35 percentage points cheaper than their 30-year counterparts, according to HSH.com.

Homeowners who are refinancing stand to gain the most from the spread between the two loans. In the past, refinancing from a 30-year into a 15-year mortgage usually meant ending up with a bigger monthly payment in exchange for a slightly lower rate. But in today’s market, the much lower rate allows some borrowers—particularly those who have been paying down a 30-year mortgage for several years—to make this switch without seeing an increase in that payment.

For instance, a couple who signed up for a 30-year $300,000 mortgage in January 2004 with a 5.75% fixed rate would have a roughly $1,751 monthly payment. By refinancing the remaining balance of about $255,828 into a 15-year fixed rate loan at 2.81%, the new monthly payment would be slightly lower at almost $1,744.

Longer term, the benefits add up even more. By reducing the repayment period, the couple would save just over $127,300 in interest over the life of the loan. In addition, they are building equity into their home faster than borrowers with longer-term mortgages. That means they could be more likely to get approved for home-equity loans and borrow a larger amount against their home.

Attention Turned to China as New Year Approaches

Chinese stocks have staged a remarkable comeback in the final weeks of 2011, gaining more than 11 percent in December after languishing in negative territory for most of 2012, prompting analysts to say 2013 may finally be the year Chinese stocks break out of the doldrums.

The Shanghai Composite Index last week hit a five-month high on Christmas day and was trading 0.4 percent higher on Friday as investors bet that the worst is over for Chinese stocks.

According to Jack Bouroudjian, CEO of fund manager Bull and Bear Partners, money is waiting to return to the Chinese stock market now that the dust has settled on the once-in-a-decade leadership transition in November.

"During an election or transition of power, usually you get that type of dysfunction and disruption. It's one of the reasons people avoided China over the course of this last year," Bouroudjian told CNBC Asia's "Squawk Box" on Friday.

"Guess what? The dust has now settled. We are going to see capital go back to China," he added.

Low valuations, economic stimulus and several rounds of monetary easing were all supposed to bring about a long-awaited turnaround in China's languishing stock market, but for most of 2011, Chinese stocks have failed to live up to their promise. China's stock market has made losses for three years from 2009 to 2011 and fell a whopping 20 percent between May and December this year.

While the Chinese market has seen a few rallies this year, they have been short-lived. For example, from late September to the middle of October the market gained about 6 percent in 4 weeks, only to reverse direction.

The Shanghai index has also treaded below the 2,000-point level several times last year.

But as the key index recovers this month on more signs that the worst could be over for the Chinese economy, analysts are becoming more optimistic that 2013 could be the year Chinese stocks rebound.

Data on Thursday showed annual growth of China's industrial profits quickened 22.8 percent in November from October's 20.5 percent, reinforcing signs of a steady economic recovery thanks to pro-growth policies.

"Economic fundamentals are definitely improving, and that should underpin the rally," said Norman Chan, head of investment with Caliber Asset Management in Hong Kong. "We think that the rebound can continue into 2013."

Despite this month's gains, the Shanghai Composite is still the worst performer among the major indices this year, having gained about 0.6 percent. The S&P 500 is up 12.8 percent in the year to date, Japan's Nikkei 225 has climbed 23 percent and Hong Kong's Hang Seng has gained 22.9 percent.

According to the charts, the Shanghai index could climb to the 2,400-2,500 range in the first half of 2013, implying an upside of about 8.5 percent to 13 percent from current levels, Chan added.

Alan Lam, analyst with Julius Baer in Hong Kong, agrees that the market is near a bottom.

"We have always said that the market would see a bottom in the fourth quarter, and I think that's what's happening," Lam said. "We think there will be short-term corrections on the way up, depending on how the economy performs, but I do think in 2013, the Shanghai Composite will be in positive territory."

In 2013, most economists are expecting the Chinese economy to expand more than the 7.5 percent forecast for 2012, the slowest annual growth since 1999.

Muni Bonds Gain Popularity Among Investors

Yield-hunting investors who are willing to endure a little short-term volatility are considering municipal bonds.

Why now? What about the heated debate in Washington, where lawmakers are mulling changes to the favorable tax treatment of debt sold by states, cities and other municipalities, as well as nonprofit organizations?

2013 will bring new factors to consider as you plan your retirement savings. MarketWatch's Christopher Noble recently discussed tips on how to protect your funds in the coming year.

The interest earned on most municipal bond holdings is exempt from federal income taxes (and in many cases state and local income taxes).

But faced with the challenge of how to curb spending and raise revenue, politicians could decide to tax muni interest or in some way limit the tax break.

Difficult as it might be, look beyond the headlines. Muni bonds deserve closer inspection because, simply put, they often carry higher yields than their taxable counterparts. Moreover, credit quality is likely to improve with the economy.

“With a reasonably favorable credit environment for municipalities, we still expect muni bonds will be the place to be,” says Matt Tucker, head of fixed income strategy at iShares, a unit of investment giant BlackRock Inc. The highest-quality, AAA-rated 10-year muni bonds yield about 1.76% — on par with similar Treasury yields but worth more if you’re in one of the higher tax brackets.

“Once you decide what your allocation to fixed income is, you look for the best alternatives within fixed income — and munis make the most sense,” says Thomas Metzold, a manager of the $5.1 billion Eaton Vance National Municipal Income Fund,which gained 14.1% this year through Dec. 26, according to investment researcher Morningstar Inc.

Municipal bonds of all maturities have returned 7.2% so far in 2012, according to an index compiled by Bank of America Merrill Lynch. The index’s effective yield is 2.6%.

At the same time, the firm’s Treasury bond index has returned about 2%, and its effective yield is just under 1%.

Metzold cautions that the muni market is unlikely to duplicate such strong performance again in 2013 because interest rates fell so dramatically this year. Bond prices rise when interest rates decline.

“Next year, we look to clip the coupon, which isn’t bad in a low interest-rate environment,” he says. Meanwhile, he adds, the alternatives for income investors are hardly attractive: certificates of deposit and money-market accounts, for example, offer close to zero-percent return and in fact lose money after factoring in taxes and inflation.

Still, the federal debate over munis’ tax-exempt status bears watching. The topic has come up in the past and the tax exemption survived because it was deemed an effective subsidy for state and local governments that benefitted their citizens.