VA Refinancing: When You Should Consider Shortening Your Loan

You know how a little sacrifice today often pays off in the long run? It can be the same with mortgage refinancing, if you take advantage of the opportunity to shorten your mortgage loan. There are a few good reasons to consider using VA refinancing to shorten the term of your mortgage, but it also helps to recognize the triggers for when you should consider shortening your loan.

Reasons to Shorten Your Loan

30 years is the most popular mortgage term for a simple reason – it spreads payments out over a long stretch of time and thus makes the loan more affordable. However, if you can afford a bigger payment from month to month, there are some good reasons to shorten your loan term:

  1. To reduce long-term interest expense. It's a simple equation: the longer you pay interest, the more interest you are going to end up paying. Using VA refinancing to switch to a shorter loan can save you years worth of interest payments. This especially makes sense if you are several years into your original loan. Think about it: if you have 20 years left on a 30-year mortgage, does it make more sense to refinance to a new 30-year mortgage and thus sign up for another ten years of interest payments, or switch to a 15-year mortgage and save five years worth of interest?
  2. To build equity more quickly. Building equity in your home can increase your financial flexibility in the future, giving you more options to refinance or get a home equity loan. The shorter the loan, the faster you pay down principal, so refinancing to a shorter loan term can help you build equity more quickly.
  3. Because shorter loans have lower rates. Take a look at 15-year rates compared to 30-year rates, and you are bound to notice that the shorter rates are considerably lower. This can add to the interest savings of a shorter loan.
  4. To take advantage of an Interest Rate Reduction Refinance Loan (IRRRL). One of the ways the Veterans Administration streamlines mortgage refinancing is with an IRRRL. This program allows you to refinance with no new appraisal on your home, removing a potential barrier to refinancing. An IRRRL is available for VA refinancing if you are either switching from an adjustable-rate to a fixed-rate loan, or if you have an opportunity to reduce your mortgage rate. Shortening your loan term can improve your chances of lowering your interest rate, so if you lack equity in your home this is one way you can become eligible for refinancing via an IRRRL.

Triggers to Shorten Your Loan

A key consideration when shortening your loan term is making sure you can afford the higher monthly payments that generally come with shorter loans. Here are some triggers that may indicate this is possible:

  1. When you get a raise. If you have gotten a significant bump in pay since you signed up for your original mortgage, your budget may now have enough room to allow for a shorter loan with higher monthly payments.
  2. When you get married. If you get married or otherwise bring another adult in as a long-term addition to your household, you may now have two incomes supporting your budget, and shortening your loan term may become a possibility.
  3. When you pay off other debt. When you make the last payment on a student loan or car loan, it frees up a significant chunk of money in your budget. You can parley that extra money into greater savings by putting it towards higher monthly mortgage payments so you can shorten your loan.
  4. When short-long interest rate spreads are compelling. As mentioned previously, shorter-term mortgages almost always have lower rates, but how much lower can vary. For example, in mid-2010, the difference between 30-year and 15-year mortgage rates was about 0.50 percent. By late 2013, this spread had widened to a full 1 percent. The wider the spread, the more compelling the opportunity to save by shortening your mortgage term may become, and those lower rates can help offset the higher payments that come with a shorter loan.

Shortening your loan term is an important VA refinancing option to consider. Think of it this way: your investment in higher monthly payments can pay off greatly in the form of interest savings by the time the loan is paid off.

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