Up until now we have seen the opportunity to refinance mortgages to lower interest rate, to refinance between fixed interest and ARM (Adjustable Rate Mortgage) and even to extend our mortgage in order to lower our monthly payment.
In this page we will consider home refinancing to a shorter mortgage term, while disussing the advantages and disadvantages of the process.

Refinance to a shorter term is a viable option when trying to save more money on the mortgage – yet market interest rates have not plunged nor did our credit score changed significantly enough to enjoy lower rates (this can also happen due to the fact that we had a good credit score to begin with).

When this is the case, we have the option to refinance to a shorter term mortgage a decision that will allow us to finish the loan earlier and save more money by paying less interest throughout the loan’s life. Such home refinance will also allow the loaner to gain home equity faster – since he will be paying more of the loan’s principal and less interest throughout the new loan’s life.

Increase Overall Savings

As explained above, home refinance to a shorter term when interest rates are not lower will most definitely result in higher monthly payments – not an easy path to chose.
But, if our personal financial capability have increased so we can afford higher payments throughout the mortgage’s life term, we will save a significant sum of money by paying less interest.
Cautious! Don’t take higher monthly payments if you see your home spending increase in the far future. There are cases where we can afford higher payments for a short period of time – these are not good cases to refinance.

Let’s take an example: If we pay a 5% interest loan for 20 years, on a 200,000$ mortgage, we basically pay throughout the years (in an amortization payments table) 116,800$ in interest alone!
But let’s say that we paid this loan for 3 years, and then refinanced to a 5.5% mortgage for another 10 years (thus reducing the overall loan’s life to 13 years), we paid around 30,000$ in interest for the first 3 years and 55,000$ for the additional 10 years.
so overall – with refinancing we paid an overall of 85,000$ – almost 30% percent less than our original loan and this is with an increased interest of 0.5% !!

Warning! This example will make our monthly payment go up from an original 1,300$ to 1,950$ – that’s a big difference that should not be taken lightly. Plus, the saving will be a bit less since the home refinance process will have closing costs

Loan Repaid Faster

The main benefit that is overlooked by Shorter Term Homer Refinancing is the fact that the mortgage will end sooner. Thus the property will all be owned by the loaner after a shorter period of time, and he will have more time “mortgage free”.
This will enable the loaner more flexibility in the future, either by increased cash flow closer to retirement age or by the ability to sell the property without needing to take loan considerations under hand.

Use the extra cash gained in the future wisely: make higher contributions to you retirement plan, travel or enjoy more leisure and costly activities. Enjoying a better cash balance after 10-13 years is very much advisable to homeowners with kids that may want to use this to pay for their academic education.

Equity Gained Faster

Home equity is the difference between the property’s worth and the remainder of the loan. By paying the loan faster we are increasing the equity owned by us quicker.
Gaining equity from our property good since it allows greater flexibility with our home. The equity can be used for getting extra loans or “home-equity loans” meant for home improvement projects or other purposes. By having more equity and less debt – we improve our credit score and our overall financial status.

Mix short term refinancing with lower interest rate

The best possible advice is to consider shortening the loan’s life term when you see a sharp drop in the market’s interest. The combination can work wonders: we can both shorten the loan while keeping the same monthly payment or in extreme cases even lower it.

In the example above, if the 200,000$ was originally taken in 7% fixed interest rate – we will pay 1,550$ each month for 20 years.
But if after 3 years we see a drop in rates to 4.5%, we can home refinance the rest of our principal (185,140$) for another 12 years and pay 1,650$ each month – a very slight difference.

This act saves us around 23,000$ (20%), we don’t pay much more every month and we will finish our mortgage 5 years earlier.

In conclusion,

Shortening the mortgage term through home refinance is an option worth considering. It will allow for overall hefty savings.
This process is meant just for those who can afford the action, since doing it with the same mortgages rates will result in higher monthly payments.