Millions 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.
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 FreeRateUpdate.com, 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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