Home Mortgage Refinancing Strategies: Decreasing Loan Term

Home Mortgage Refinancing Strategies for You

Although decreasing a loan term means higher payments for the borrower, it also means many advantages. Moving from a long term mortgage to a short term is one of the most popular refinancing directions today, and there is a reason—the short term loan offers a way for the homeowner to save on interest payments and build up equity faster than other loan, and often carries a lower interest rate as well.

Equity and Interest -- Is Home Mortgage Refinancing the Right Course

Keep in mind that not only are borrowers building equity when they make house payments, but they are reducing the amount of money that the next interest charge is based on. This is called amortization, and is why a first payment is almost all interest and a last payment is almost all principal. This means that if you are going to pay off a loan in 15 years, you had better start paying down principal fast.

How Reducing Mortgage Terms Can Work for You

In general, here is how a reduction in mortgage terms can work for you, based on a table published at www.rightloans.com. Let’s say you are shopping for a $100,000 loan at 6.5% interest rate and a base term of 30 years, meaning you will save no money on your interest over the life of the loan. If you reduce the mortgage term to 25 years, you will save $24,982.34. That’s about $1,000 per year, just for a five year difference in terms, and for that you will only pay about $43 per month more on your payments.

The 20 Year Loan

Moving on to a 20 year loan, your savings are almost doubled! You will save $48,606.94. Your payments will only be about $110 per month more. Moving on to the popular 15 year loan, your savings are about $70,000 and payments about $240 more per month. The ten year loan will save you a whopping $91,286.92! Granted your payments have almost doubled, but if you have that kind of regular income the almost $100,000 is money in the bank.

Your Tax Deducation

While this does mean you will have less of a tax deduction, in most cases it doesn’t compare to the savings in interest payments. Term reduction is also a great way to approach a cash-out refinancing. If you reduce your term enough to save $50,000 and only use a small portion of that for your home improvement or other project, you are still ahead.

Seek Professional Assistance

Always ask a tax professional before refinancing a mortgage to make sure of the impact on you at filing time, and work with reputable lenders. If you are ever in doubt, see a lawyer to make sure you aren’t being taken advantage of.