What's the Right Mortgage Term For You?
Mortgage tip: low interest rates aren’t the only—or the best—reason to refinance. Experts suggest that shortening the term of a mortgage can be just as good a reason to refinance, particularly when it helps the homeowner save a significant amount of money in the long run.
How do you know if refinancing to a shorter term is right for you?
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Your financial goals are long-term rather than short-term. If retirement is on your radar, you may want a shorter term to reduce the overall cost of the mortgage (how much you’ll pay over the life of the loan) and how soon you’ll own the home free and clear, both of which can leave you with more cash in retirement.
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You can handle a higher monthly payment. “Shorter terms usually come with lower interest rates, but you’ll usually pay more each month,” says Amy Moser, vice president of mortgage services at Mountain America Credit Union. For example: A 30-year mortgage on a $200,000 home at 3.625% costs $912/month while a 15-year mortgage at 2.750% costs $1,357/month (taxes and insurance not included). The 15-year mortgage saves you more than $84,000 over the life of the loan. Moser recommends using a refinance calculator to determine if a higher monthly payment will work for your budget.
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The larger monthly payment on the shorter term loan isn’t needed elsewhere. Before you refinance, think about whether the larger monthly payment would be better spent elsewhere—i.e. paying off more time-sensitive financial obligations like student loans and credit card debt. Time magazine finance author Ruth Konigsburg warned, “At the end of the day, refinancing isn’t just about saving money; it’s about what you do with that money that can make a huge difference to your long-term financial security.”
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The term of the refinanced mortgage is less than the time remaining on your existing mortgage. “All mortgages include certain fees, regardless of the lender,” says Moser. “Unless the interest rate is substantially lower on the refinance, switching to a 15-year mortgage when you have only 18 years remaining on your existing mortgage may not save you much.” In that case, it may be better to increase the amount of money you pay each month on your existing mortgage instead.
Meet with your own financial advisor to explore your options.
