Home Mortgage Refinancing Strategies: Increasing Loan Term

Home Mortgage Refinancing Strategies Introduction

There is much talk about loan terms lately, with the 15 and 20 year mortgages increasing in popularity. One reason for this is these loans are notorious for building equity more quickly for the homeowner. This also means she is paying less interest over the life of the loan, sometimes less than half what she would normally have paid. Increasing the loan term, then, sounds like an exercise in padding other people’s pockets.

However, not everyone can increase their payments, nor does everyone see an increase in wages regularly. Although most people thing their wages will rise with time, the job market is a volatile one, and often a change in jobs, professions, or a partner’s loss of employment can threaten a family’s status as homeowners.

Lengthening the Term of Your Loan

If you have had life circumstances that make lowering your payments critical, you might consider extending the length of your loan. For instance, although the change in total interest payment is much greater for a traditional 30 year mortgage than for a 15 year fixed rate loan, the payments might be just low enough for you to get by until your financial situation improves.

Is There Really a Difference?

However, remember that any monthly payment reduction, unless a far lower interest rate is available, is not going to make that much of a difference. An example: if you were paying 6.5% on a $100,000 15 year loan, your payments would only be $40 more per month than with a 30 year loan. If the interest rate is higher than your original loan, you may end up with a higher estimated payment.

The 40 Year Loan

The 40 year loan is gaining in popularity these days, but so is the residual balance mortgage. This mortgage acts just like a balloon mortgage; the payments go for 30 years at the monthly payment rate of a 40 year loan. At the end of the 30 years there will be an unpaid balance, called the residual. This is due at the end of the 30 years, but can also be refinanced. Although this may seem like en enormous amount of time to be indebted for a mortgage, remember this homeowner expects his wages to be restored at some point, at which time she can refinance to a more advantageous term.