Choose a shorter term when refinancingMillions of homeowners have taken advantage of reducing their debt by refinancing in recent years as mortgage rates have fallen to record low levels. While refinancing does not lower the principal amount owed on the loan, it does lower the interest and monthly mortgage payment. To take full advantage of a new mortgage that really works at lowering debt, consider a shorter term loan when refinancing.

Lower Payment or Shorter Term

When homeowners refinance to reduce the mortgage rate, many will return to a 30 year mortgage. By doing so, the years that have been already paid are wiped out and added back on. Depending on how long the original mortgage has already been held and paid, some of the principal may be reduced. However, when adding in closing costs, the homeowner may find that they are very close to where they started. However, the longer term method of refinancing is popular because many homeowners want to save money by having a lower monthly mortgage payment.

In order to reduce the mortgage debt at a faster pace, using a shorter term loan when refinancing is the answer. Moving from a 30 year mortgage to a 20 year or 15 year mortgage will allow the homeowner to save thousands of dollars on the total interest that is paid back on the loan. In addition, the loan will be paid in half the time if going from a 30 year term to a 15 year term. In many cases, when refinancing to a shorter term loan when rates are low, the homeowner will find that the monthly mortgage payment is approximately the same as what they were already paying on the existing mortgage. In some cases, the monthly payment may even be slightly lower. When homeowners are comfortable with their existing payment and not in need of extra cash every month, a shorter term mortgage is the faster way to savings.

Building Equity

Another benefit of a short term mortgage is the opportunity to build equity in the home at a faster pace. Most homeowners look forward to owning their home outright at some point, free and clear of mortgage debt. The shorter term loan is the answer to accomplishing this without the need of a large sum of money to pay down the principal debt.

The best way to decide whether to take a longer or shorter term mortgage is to request a Good Faith Estimate from the lender for both types of loans so that they can be compared. There will always be some homeowners who need flexibility and will not be comfortable with taking on a shorter term. Some may be planning to move in a few years, whereby a shorter term will not be the best choice. In these cases, refinancing to lower rates with a 30 year loan can still work out. Homeowners who choose a longer term loan can always make an extra principal payment when finances allow. Although the mortgage rate will not be the lower shorter term rate, paying down principal will reduce the term of the loan.

When refinancing, the best approach is to look at the whole picture. Knowing where you are, where you want to be and where you are heading is important to making the best decision.

Author Bio: Rosemary has been writing since 2010 for, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, mortgage processor, property manager, and a mortgage underwriter.

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  1. With a smaller rate, keeping the same monthly repayments should already shave several months or even years off the mortgage. Getting a shorter term is quite risky with so many layoffs and the unstable economy. I have refinanced but kept the term and try to make overpayments here and there.

    1. I can understand that, but with the lower rates, you can sometimes lower your term and keep your payment about the same. Paying the same amount at a lower rate will usually not shave off half of the mortgage term if you choose a 15 over a 30. This all depends on a person’s situation though.

  2. We refinanced a couple of different houses and took shorter term loans on all of them. We were able to move from a 30 to 15 on 2 of them and 30 to 10 on another…all while keeping the same payment! It is awesome because we will own our houses in half the time while paying much less in interest.

  3. Great advice. Always important to look at the big picture. Short-term wins are often at the expense long-term benefits.

  4. When I refinanced years ago, I took the 15 year mortgage for 2 reasons. Lower interest and I knew I wanted my mortgage paid off by the time I retire. I worked very well and I will have it paid off in about 4 years.

    1. Many always just think about the monthly payments, which are important, but they forget to realize how long they will be paying those payments.

  5. I do get the financial benefit of a shorter term. My preference–and everyone is different–is to sign up for a 30-year mortgage but then make payments as if it’s a 15-year mortgage. Yeah, my rate’s a bit higher than if I got the 15-year mortgage, but I like the flexibility to make a lower (30-year) payment if I have to because of temporary financial strains. I see the slightly higher interest rate on the 30-year as a premium I’m paying for ‘flexibility insurance.’ Depending on circumstances, this may or may not be a good strategy for others.

    1. Good points Kurt. This gives you the flexibility of paying more or paying the minimum if something comes up. The issue that I see is that many won’t have the control to pay more each and every month, so the 30 year will still be a 30 year.

  6. Yes, a wonderful idea I must admit.. opting for greater term and paying up extra principal payments whenever there are sufficient funds to do so.. I would say, walk the extra mile to be a little frugal and avail this option..see how things work!

  7. We haven’t refinanced but we have always paid extra on the mortgage when we could to shave off years of our mortgage. I think refinancing is an option as long as one runs all the numbers and they make sense to take the plunge.

  8. I’m currently in the process of getting a refinance, and I wish that I’d thought about getting the shorter term when I initiated the process. One of the things that I like about the program that I got into was that they didn’t do anything more than a credit check to see if I was qualified — proof of employment is sometimes difficult for a freelancer (It’s not glorified unemployment – but working gig per gig, it looks like a scatter sheet in terms of where the money comes from) . Thank you for posting this! 🙂

    1. That is pretty cool. What program did you find for that? I am sure other freelancers would love to know.

  9. You can’t refinance into a shorter term if you have an FHA loan, but you can still pay extra on the loan.

    1. You are correct Jenny, but they do let you refinance out to a shorter term by getting a whole new loan. It is like the original process all over again.