Shorter Loan Terms can lower your monthly payments!
Introduction
If you're looking to refinance your mortgage, you may want to consider shortening your loan term. This can help you save money in the long run and lower your monthly mortgage payments. In this article, we'll explore the benefits of shorter loan terms and how they can benefit you.
What is Mortgage Refinancing?
Mortgage refinancing is when a borrower replaces their existing mortgage with a new loan. This is done to either lower their interest rate, change their loan term, or to access the equity in their home. Refinancing can help homeowners save money on their monthly mortgage payments, or free up cash for other uses.
Types of Mortgage Refinancing
There are two main types of mortgage refinancing: rate-and-term and cash-out. Rate-and-term refinancing involves replacing your existing mortgage with a new one with different terms, such as a lower interest rate or a shorter loan term.
Cash-out refinancing, on the other hand, involves borrowing more than you owe on your existing mortgage and using the difference to pay off other debts, fund home renovations, or invest in other properties. This type of refinancing can be beneficial for those who need access to extra cash.
The Benefits of Shorter Loan Terms
One of the best ways to save money on your mortgage is to shorten your loan term. Most mortgages are 30-year fixed-rate loans, but you can also get a 20-year, 15-year, or even a 10-year mortgage. The shorter your loan term, the lower your interest rate and the quicker you can pay off your mortgage.
Lower Interest Rates
Shorter loan terms typically come with lower interest rates, as lenders view them as less risky. This can save you thousands of dollars in interest payments over the life of your loan. For example, if you have a $250,000 mortgage with a 30-year term and a 4% interest rate, you'll pay $179,674 in interest over the life of your loan. However, if you have the same loan with a 15-year term and a 3.25% interest rate, you'll only pay $66,102 in interest.
Build Equity Faster
Shorter loan terms also allow you to build equity in your home faster. Equity is the difference between the value of your home and the amount you owe on your mortgage. When you make mortgage payments, a portion of each payment goes towards paying down your principal balance, which increases your equity. With a shorter loan term, you'll pay down your principal balance quicker, which means you'll build equity in your home faster.
Lower Monthly Payments
While shorter loan terms can mean higher monthly payments, they can also lower your monthly payments in the long run. This is because you'll pay less interest over the life of your loan, which means your monthly payment will be less. For example, if you have a $250,000 mortgage with a 4% interest rate and a 30-year term, your monthly payment will be $1,193. If you have the same loan with a 15-year term and a 3.25% interest rate, your monthly payment will be $1,757. However, over the life of the loan, you'll pay $215,183 less in interest with the 15-year loan.
Conclusion
Shorter loan terms can be an excellent way to save money on your mortgage and lower your monthly payments. By choosing a shorter loan term, you can take advantage of lower interest rates, build equity faster, and pay less interest over the life of your loan. If you're thinking about refinancing, consider shortening your loan term to see how it can benefit you.