Mortgage Q & A: Refinance to a Shorter Mortgage Term?

Q: I'm planning to retire in about 10 years. I want to refinance my mortgage, and have heard that it's possible to refinance to a loan with a shorter mortgage term than 30 years. This sounds like a good idea, but I am a little worried about the higher payments required. Any suggestions?

A: Yes, you can refinance to a shorter mortgage term. The most typical option is a 15-year mortgage, which we will use as an example here. You are right that the monthly payments would be higher for a shorter mortgage term, but there are benefits as well.

Shorter Mortgage Term: Big-Time Interest Savings Possible

Let's compare a 15 and 30 year mortgages of the same amount and mortgage rate:

30-year mortgage refinance for 200,000 at 4.75 percent:

  • Monthly principal and interest (P&I) payment: $1,043
  • Interest paid over full 360 month loan term: $175,586

15-year mortgage $200,000 at 3.75 percent (this is for illustration purposes only -- as noted below, rates for 15 year home loans are lower than rates for 30 year mortgages):

  • Monthly P&I payment: $1,454
  • Interest paid over full 180 month loan term: $61,798

In this example, you could potentially save $113,788 in mortgage interest, but here are some things to keep in mind as you shop for a refinance loan.

Shorter Mortgage Term Comparisons: Things to Know

  • According to this example, the total interest paid on the 15-year loan is approximately $113,788 less than that of the 30-year mortgage paid over its full term. In most cases, home loans are paid off or refinanced before they reach their final payment due date.
  • Interest rates are typically lower for 15-year mortgage loans than for 30-year financing.
  • Refinancing requires paying closing costs and fees. Check out our refinance calculator for comparing your existing mortgage's terms to available refinancing terms. This calculator can help you determine how long it would take to break even and recoup your refinancing costs.
  • In the example above, the payment calculations do not include amounts for taxes and insurance.

View refinance rates and compare your options using online mortgage calculators. Remember to review your quotes carefully, as lender fees, discount points and interest rates

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