Many borrowers are taking advantage of today’s record low rates to refinance and reduce their mortgage payments, but have you ever considered reducing your term as well? Applying for a new, lower rate AND dropping the number of years on your mortgage can and will reduce the overall amount you pay for the life of the mortgage.
Consider this. A homeowner who bought their house 2 years ago and financed $200,000 over 30 years at a rate of 5% has a principal and interest payment of $1073.64. If they were to refinance to a new 30 year mortgage at 3.5%, their new payment would be about $898.09, depending on pay-off and new closing costs rolled in. That’s a savings of $175.55 per month. Not bad. But now consider the same refinance, but for 25 years. The same rate would result in a payment of $1001.25 for a savings of $72.39 per month. Doesn’t sound like much until you look at the fact that the new 25 year mortgage also got rid of 3 years of the mortgage payment.
If that borrower kept the original mortgage they had, they would pay over $360,000 over the course of the remaining 28 years. By refinancing to a new 25 year mortgage, they not only save the $72 per month, the overall payment over the life of the new loan is $300,375. That’s a savings of over $60,000.
So, when considering a refinance, consider the lower term as well. Many are utilizing this option and will be greatly rewarded for it in the years to come.
Some say that the shorter term a loan has, the better. But this is not always the case. Not everyone can afford to cover the higher monthly payments that short-term loans come with. But it’s a good thing that there’s the option of refinancing. This makes it easy for homeowners to replace their previous loan with a shorter one and save money on the interest rate.
ReplyDeleteErick Bush