You’re ready to do a mortgage refinance to lower your rate, but are you getting the best possible advantage from your mortgage refinance? Current mortgage rates allow more borrowers to qualify for loans with shorter repayment terms. Instead of automatically refinancing to a new 30 year mortgage, consider home loans with terms of 10, 15 or 20 years.
Benefits of Refinancing to a Shorter Mortgage Term
- Lower mortgage rates: Because loans with shorter terms are less risky to lenders, they can offer lower rates. Rates for 15-year mortgages, for example, run about .5 percent below those for 30-year loans.
- Less interest paid over the life of the loan: The faster you pay off your home mortgage, the less interest you’ll pay. Use an online mortgage calculator to estimate the potential savings of refinancing to a shorter loan. The savings depends on how much time remains on your existing mortgage and its interest rate.
- Mortgage freedom, faster: Think of how you would use the money you spend on mortgage payments. Possibilities include paying off consumer debt, adding to savings, home improvements and travel.
- Building home equity: Payments for a shorter term mortgage are higher, but with lower mortgage rates and larger amounts applied to mortgage principal, you’ll build home equity faster.
- Break even on closing costs faster: Because loans with shorter terms give you lower rates for the same closing costs, you’ll recoup your refinance closing costs faster and start putting money in your pocket sooner.
Disadvantages and Considerations
Don't ignore the potential downsides when considering a refinance to a shorter term.
- Higher monthly payments: This may increase the challenge if you lose income or experience unexpected expenses.
- Diverting money from investments: Paying off your mortgage faster might not be the best use of your money. Weigh the benefits of other investments, retiring higher-interest debt or additional contributions to retirement savings.
- Extending your loan term: If you’realready close to paying off your mortgage, the benefit of refinancing to a lower term may not exceed the costs of doing so.
Discuss your needs and goals with mortgage loan officers and your financial advisor to find the right refinancing terms for your situation.