Refinancing For A Shorter Term To Save Money
Refinancing for a shorter term to save money with lower rates is not the only reason you should refinance your home. Considering the option for a shorter loan can save thousands of dollars in interest and free up income for use in the future. A short term loan can also help you pay down your principal faster.
Refinancing to a shorter term loan can not only save you tens, and possibly
even hundreds of thousands of dollars over the life of your loan in interest
just from simply reducing your loan term, but you can also generally qualify
for a better rate by lowering your term to a 20 or 15 year loan term from a
30 year term as well. Some people even need to do the opposite of
refinancing for a shorter term to save money, and they need to refinance to
a higher term to save money monthly on their monthly mortgage payment.
Although, they will end up paying more money over the life of the loan, they
will be able to save money off of their monthly payment by increasing their
Shorter term mortgages typically come in 20, 15 and 10 year terms.
The homeowner should establish their objectives for refinancing first to determine if this is an option for them. Once personal goals for refinancing are established then finding the best product will not be a problem.
Most people think that by refinancing from a 30 year fixed loan to a 15 year fixed loan, their payments will double. Why wouldn't they? You are paying off the loan twice as fast, so the payments must be twice as much. What most people don't realize is that most of your monthly payments go toward interest. A much smaller portion of your payment actually goes toward reducing the balance of the loan. If you cut the loan term in half, you will still pay the same amount in interest each month. It is your monthly principle payment that goes up, and since this payment is already relatively low, it doesn't take a huge increase in the total payment to be able to pay your loan off in half the time.
Generally, the shorter the loan term the faster you build equity. For many families this can be useful as you can plan your mortgage to be paid off at the same time you plan to incur new expenses such as a college education or a retirement home.
An interesting alternative to refinancing into a shorter term mortgage to save money you would otherwise spend on interest is to make annual prepayments to your 30 year mortgage. You can make an annual prepayment by making one extra payment per year, or you can simply increase your monthly payments by 8.33%
A shorter term means less interest. Although your monthly payment is going to be higher if you refinance from a 30 year fixed to a 15 year fixed, your interest rate may be lower as well as the amount of interest that is paid throughout the life of the loan. To save the most money in the end, you want the shortest term possible.
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Information listed above is to be used for educational purposes only and is not guaranteed
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