Understanding Shorter Loan Terms - What you need to know!
Why Consider Shorter Loan Terms?
Mortgage refinancing can offer numerous benefits, most notably access to lower interest rates, smaller monthly payments, and even cash-out options. However, if you're considering refinancing your mortgage, there is another important consideration that you may have overlooked - the length of your loan term.
While traditional loan terms typically span 30 years, many refinancing options are available with shorter repayment periods, such as 15 and 20 years. These shorter loan terms provide several advantages, including:
Lower interest rates
Faster equity accumulation
More significant cost savings over the life of the loan
Overall lower risk
Lower Interest Rates
One of the most significant benefits of shorter loan terms is that they often come with lower interest rates. This is because lenders view shorter loan terms as less risky since they carry less uncertainty over the long term. As a result, lenders will offer lower rates of interest, which can mean substantial savings over the life of your mortgage.
Faster Equity Accumulation
Another key advantage of shorter loan terms is that they allow you to build equity in your home at a far faster rate. This is because you are required to make larger monthly payments which go primarily towards the principal balance, reducing the interest that you pay overall. This means that with each payment, you are increasing the percentage of your home's value that you own, making you a more secure and stable borrower.
More Significant Cost Savings Over the Life of the Loan
It's a common misconception that 30-year loans are more affordable when mortgage refinancing. While the monthly payments may be lower, the longer repayment period means that you will ultimately pay more in interest. By refinancing with a shorter loan term, you can save tens of thousands of dollars over the life of your mortgage.
Overall Lower Risk
A shorter loan term also carries less risk overall since you'll be able to pay off your mortgage quicker. This translates to greater financial flexibility in the long term since you'll have more disposable income once your mortgage is paid off. Furthermore, you'll be able to use this newfound financial stability to invest in other assets or save for retirement.
Conclusion
When mortgage refinancing, it's essential to consider the loan term as it will directly impact the overall cost of your mortgage. By choosing a shorter loan term, you can take advantage of lower interest rates, build equity faster, save more over time, and lower your overall risk.
If you're considering mortgage refinancing, be sure to consult with a professional to discuss the advantages and disadvantages of the different loan terms available to you. With the right information and guidance, you can make an informed decision that will benefit your financial situation both now and in the future.