Short Term Mortgage Refinancing Considerations
A shorter term mortgage refinancing plan definitely sounds appealing. The ability to pay off your mortgage in 10, 15 or 20 years instead of 30 relieves you of this financial burden sooner, perhaps even before you reach retirement age, and amounts to considerable savings. The downside however is that your monthly payments likely will be higher with a shorter term loan. Let’s take a closer look at shorter term refinance considerations.
As mentioned above, the trade off of higher monthly payments associated with a shorter mortgage term refinance is twofold. You’ll be relieved of this tremendous financial burden sooner. Plus you stand to save tens of thousands of dollars in interest. These two benefits are realized even if you take just 5 years off your mortgage term. Thirty years is a long time, so if you can afford it now and in the future, this may be right for you.
As happens anytime you apply to borrow money, the lender will start by assessing your risk to determine whether you’re a good candidate for a short term refinance. The lender does this by checking your credit score and history. Doing so lets the lender see how you’ve managed your debt in the past, particularly as it relates to repaying it. Opting to refinance with the same financial institution that approved your original mortgage may save some time but should not be the determining factor.
Also consider the rates and fees being charged, and always ask whether there is a penalty for early repayment of the mortgage. Remember, lenders are in this business to make money. Fees, penalties, other closing costs, and higher interest rates are some of the ways in which they profit.
Other reasons to consider a shorter term mortgage refinancing
If you plan on selling your home soon, and you have equity in your home, refinancing into a short term interest only loan may be worth considering. Once you sell the home, you use the proceeds from the sale to cover the interest costs and you get to keep the rest as profit.
When you originally applied for your mortgage, you had a choice between a fixed rate mortgage and an adjustable rate mortgage or ARM. Using any of the online calculators, you could calculate how much you’d be paying monthly for the different loan programs. Well when you refinance, you can use the same type of tools to help calculate monthly payments. By doing so you’ll have a better idea whether a short term fixed rate or a short term ARM refinance makes more financial sense.
Which is right for you?
Deciding between a more traditional 30-year term and a shorter term refinance is a decision only you can make. When deciding, consider your plans for the future as well as your financial situation both now and in the future. With interest rates so low, you may not notice that much of a difference in the amount you pay each month for your original mortgage as compared to the refinanced shorter term mortgage. Plus, when you decide to go for a shorter term, you’ll have the added bonus of paying off your mortgage much sooner. If you prefer to stick with a 30-year mortgage term, that’s fine too. Just work the numbers to help you decide whether a fixed or an adjustable rate refinance mortgage loan is the better choice.