NEW YORK (BankingMyWay) – American homeowners are increasingly opting for a type of mortgage that until recently was more or less unknown: the “oddball” loan with a term like 12, 17 or 24 years, instead of the standard 15, 20 or 30, customized to fit a person's individual housing situation.

But is it worth the effort to hunt down or negotiate one of these atypical deals?

It can be, but only if conditions are just right. The New York Times, citing recent data from the Mortgage Bankers Association, reports that the “other length” category made up an unusually high 20% of loans approved for refinancing in August through October, up from 17% the year before.

This type of loan is more common in refinancing than with original loans because many refinancers like to match the new loan’s term to the time remaining from the original loan. A homeowner with 22 years left on a 30-year loan might not realize any savings by taking out a new 30-year mortgage, even if the interest rate were lower, because the new loan would require eight extra years of payments. The oddball loan solves that problem.

But there is another option: Refinance to a 30-year loan and then make extra principal payments to retire the debt in 22 years, eliminating those eight years of interest payments while sticking with a more conventional loan. Two factors determine which option is better.

First, will the oddball loan get you a lower interest rate? Generally, the shorter the loan term, the lower the rate, because the lender does not tie money up for so long. According to the BankingMyWay rate survey, the average 30-year loan currently charges about 4.2%, compared to 3.4% on the 15-year loan. Many 20-year loans charge about 3.5%.

Unfortunately, you will not find market averages for interest rates at odd terms like 22 years, because they tend to be negotiated deals rather than advertised ones. But the rate on a 22-year loan should be closer to the 15- or 20-year rate than the 30-year rate.

Borrowers should also pay close attention to application fees and other charges, which could be higher on an oddball deal that puts the lender through some extra hoops.

The second issue is whether you can afford the higher payments of a loan with a shorter term, caused by the need to pay the debt off faster. For every $100,000 borrowed on a 30-year loan at 4.2%, you’d pay $489 a month, compared to $580 on a 20-year loan at 3.5%. Interest would cost about $76,000 during the life of the 30-year loan, but only $39,000 for the 20-year deal.

If the higher payments would be a struggle, either at the start or after a financial setback like a lost job, it might make sense to go with the longer term. That could also make sense if you had a better use for your money, like an investment with an expected return higher than the interest rate on the mortgage.

If you go with the longer-term loan, consider making extra principal payments every month, or as often as you can. You’ll have to live with the higher rate of the longer-term loan, but can still save a bundle by knocking off years of interest payments. For example, by taking the 30-year loan at 4.2% and adding $91 a month to the payment, you’d have the same $580 payment as on the 20-year deal. The extra principal payment would allow you to retire the debt in 22 years, with interest charges totaling about $53,500.

Sure, you’d do better with the 20-year loan, but it would be easier to qualify for the lower required payment on the 30-year deal, and you could skip the extra principal payment whenever money was tight.

Use the BankingMyWay mortgage loan calculator to weigh the options and decide which is best for you.

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