Reduce Mortgage Term While Paying The Same or Lower Monthly Payment
The recent dip in mortgage refinance rates has opened the floodgates for savings hungry homeowners to apply for new home loans. There are a variety of reasons that people refinance. Lower rates, lower payments, debt consolidation, to switch from an adjustable to fixed rate loan, or to shorten their mortgage term, among many.
Now, before you go jumping into a 15-year fixed rate mortgage in an effort to reduce your current 30-year loan, consider the following.
Currently, the spreads between 15-year and 30-year mortgages are very slim, meaning that the qualifying refinance rates are very similar between the two terms. Historically, one would expect a much lower rate for the shorter-term loan, but that has changed, at least currently. If you are considering a shorter-term mortgage with a lower rate, you may actually want to consider refinancing into a 30-year fixed rate mortgage instead of a 15-year option.
To illustrate the strategy, assume a refinancing homeowner currently has a 6.5% 30-year mortgage, with a $250,000 balance, and has paid on the loan for 3 years, so the remaining term is 27 years. The original loan amount was $260,000 with a current payment $1,643.
Assume that the borrower can refinance into a new 30-year fixed rate at 5.0% with total closing costs of $8,000, so the new loan amount is $258,000 with a new monthly payment of $1,385. This would result in a net savings from current payment in the amount of $258 per month. By applying this $258 per month savings toward principle each month, the current $1643 payment will remain the same, but the term will be reduced to 21.25 years, and a net reduction in term of 5.75 years for the cost of an appraisal.
If the homeowner went the 15-year route (closing costs being the same), the new payment would be $2,040, yielding a difference of $655 per month in payment between the 15 and 30-year 5.0% options. Applying an additional $655 per month to the new 30-year payment would result in…you guessed it… a 15-year loan term.
The point being, if you can refinance between the two terms for basically the same rates and fees, the 30-year option gives the homeowner the most control and repayment options for the same objective (reduced term), without being pigeon-holed into a higher monthly payment. Depending upon the individual, this may be the way to go.
May the Mortgage Refinance Rates be with You!
Refinance Tool Box
Now, before you go jumping into a 15-year fixed rate mortgage in an effort to reduce your current 30-year loan, consider the following.
Currently, the spreads between 15-year and 30-year mortgages are very slim, meaning that the qualifying refinance rates are very similar between the two terms. Historically, one would expect a much lower rate for the shorter-term loan, but that has changed, at least currently. If you are considering a shorter-term mortgage with a lower rate, you may actually want to consider refinancing into a 30-year fixed rate mortgage instead of a 15-year option.
To illustrate the strategy, assume a refinancing homeowner currently has a 6.5% 30-year mortgage, with a $250,000 balance, and has paid on the loan for 3 years, so the remaining term is 27 years. The original loan amount was $260,000 with a current payment $1,643.
Assume that the borrower can refinance into a new 30-year fixed rate at 5.0% with total closing costs of $8,000, so the new loan amount is $258,000 with a new monthly payment of $1,385. This would result in a net savings from current payment in the amount of $258 per month. By applying this $258 per month savings toward principle each month, the current $1643 payment will remain the same, but the term will be reduced to 21.25 years, and a net reduction in term of 5.75 years for the cost of an appraisal.
If the homeowner went the 15-year route (closing costs being the same), the new payment would be $2,040, yielding a difference of $655 per month in payment between the 15 and 30-year 5.0% options. Applying an additional $655 per month to the new 30-year payment would result in…you guessed it… a 15-year loan term.
The point being, if you can refinance between the two terms for basically the same rates and fees, the 30-year option gives the homeowner the most control and repayment options for the same objective (reduced term), without being pigeon-holed into a higher monthly payment. Depending upon the individual, this may be the way to go.
May the Mortgage Refinance Rates be with You!
Refinance Tool Box
Labels: business, finance, money, mortgage rates, refinance, refinance rates
posted by Jim Bisnett at
1:52 PM
1 Comments:
Great info on reducing mortgage term. You have clearly explained why 30-year term option is much more suitable for the homeowners.
Thanks.
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