Refinance To Shorter Term Mortgage
The decision to refinance your mortgage starts by determining what you would like to accomplish. For some homeowners, the goal of a refinance is to pay off their mortgage loan sooner. By shortening your loan term from 30 years to 20, 15 or 10 years, you can typically qualify for a lower interest rate – which could result in big savings over the life of your loan.Should You Refinance Into A Short-Term Mortgage?
The real answer to this question lies how you feel about your monthly budget. Are you comfortably paying for all of your monthly expenses? Have you paid off some of your revolving debt recently received a raise at work or started earning extra income? Do you have enough wiggle room in your budget where you feel like you could afford to put a little more toward your monthly payment?
When you refinance to a shorter-term mortgage, you’re paying less over the life of your loan, but it does result in higher monthly mortgage payment compared to a 30-year term. Even with 15-year fixed mortgages offering more favorable interest rates, you still need to make sure you feel financially comfortable with an increase to your monthly payment amount. It’s also worth considering if you might be better served by dedicating those funds to some of your other financial goals.
While higher monthly payments may not have been an option when you first purchased your home, if your financial situation has changed it’s worth reviewing your options for refinancing into a short-term mortgage.
Understanding the Savings
In most cases, switching to a 15 or 10-year mortgage from a 30-year mortgage loan equates to higher monthly payments. However, although payments might increase in the short term, it’s important to remember what you’ll be saving over the life of your loan term. That savings comes in the form of interest payments.
To help illustrate these savings, let’s take a look at a sample scenario comparing a 30-year mortgage term vs. a 15-year mortgage term. Let’s say you purchased a home for $300,000, with 20% down, a 30-year fixed-rate mortgage with a 4.0% interest rate, you would pay more than $172,000 in interest over the life of your loan. If you took that same $300,000 home, with 20% down, and a 4% interest rate, but changed over to a 15-year term, you would pay roughly $79,000 in interest over the 15-year repayment period. That is a saving of over $93,000 in interest payments.
Additionally, the example above doesn’t even take into account that 15-year fixed rate mortgages are often lower than their 30-year counterparts.
Bottom line, if you have the room in your budget, it’s worth considering refinancing to a short-term mortgage.
Term Options
It’s important to remember that if you are interested in refinancing to a shorter-term mortgage that you have options beyond a 15-year term. Mutual of Omaha Mortgage is able to offer mortgage programs and terms for 10, 15, 20, 25 and 30 years. For example, if you’ve lived in your home for 5 years, and refinanced to a 20-year mortgage, you’d still save thousands in interest payments.
As you review your refinancing options, it’s always a good idea to look at how long you’ve lived in your home, how much you’ve paid toward your mortgage principal, and how many years you have left to pay your mortgage. Don’t forget to take into account the break-even point of your refinance. The break-even point is the amount of time that you’ll need to stay in your home in order to recoup the costs associated with refinancing your mortgage.
Are you ready to get started?
If you’ve ever asked yourself the ‘should I refinance my mortgage’ question, it’s never been a better time to learn about the many possible benefits of a refinance loan. Interest rates are at or near historic lows, it’s a great time to explore your options. If you’re ready to get started, or would like a no obligation mortgage analysis, please don’t hesitate to reach out. We’re here to help you refinance to shorten your mortgage for long-term savings.