Although it’s not ideal to be in debt for the foreseeable future, many homebuyers choose to obtain a 30-year mortgage. After all, it’s typically the most affordable and reasonable option for many borrowers. However, if you ever have the opportunity to refinance, you may want to consider opting for a shorter term, as mortgage terms can range up to 30 years.
But before you make the decision to refinance your mortgage, you may want to learn more about mortgages with shorter terms to determine if it’s right for you.
Benefits
There are many reasons why you may want to refinance for a lower mortgage term.
Paying Off Debt Faster
One of the biggest and most obvious reasons you’d want to refinance for a shorter term is to pay off the loan quicker. Perhaps your household income has increased since obtaining your original mortgage. If you’re able to comfortably afford higher payments every month, you may be able to benefit from a shorter term. You’d likely pay less interest as well.
Saving Money with a Lower Interest Rate
Borrowers are usually looking for more favorable interest rates and, typically, interest rates on shorter term mortgages are lower than 30-year mortgages, which would help save you money on interest over the life of the loan. A lower interest rate combined with the possibility that you would be paying off the loan faster could potentially result in a significant amount of money saved in interest.
Building and Accessing Equity
Because you’d likely be paying a higher monthly payment, you’d also be able to build more equity faster. This could also mean that you could access your equity quicker if you need money for any home improvement projects, debt consolidation or big-ticket items with a cash-out refinance or home equity line of credit (HELOC), for example.
Converting to a Fixed-Rate
If you have an adjustable-rate mortgage (ARM), you could also use this opportunity to refinance to a shorter-term fixed-rate mortgage. This would mean that the interest rate you’d lock in would remain the same throughout the life of the loan, and you’d have a more predictable monthly mortgage bill.
Drawbacks
There are some factors to keep in mind that may deter you from obtaining a mortgage with a shorter term.
Higher Monthly Payment
Your monthly payment would be higher because you’d be paying off this loan quicker. So, before you start the process of refinancing, make sure this new payment doesn’t severely impact your budget. You’ll likely need to review how much of your income you can comfortably contribute to this new loan.
Paying Closing Costs
As with any loan, refinancing will cost money. While the exact closing costs will depend on where you live, who your lender is and your loan details, you may want to determine whether or not the costs will be worth it or if you even can afford them.
Adjusting Your Monthly Budget
A higher monthly payment will mean that you’ll likely have less money for other monthly necessities such as groceries and other bills. You may need to adjust your budget and reassess your new financial priorities.
Questions to Ask Yourself
If you’re still weighing the pros and cons of refinancing your current home loan to a shorter-term mortgage, it may benefit you to ask yourself the following questions.
How long do you plan on living in your home?
It may not be worth refinancing your mortgage if you know you want to move to a different neighborhood or upsize your property within the next few years. The upfront costs may not be worth it since you’d have to wait to break even on them.
Have you had your current mortgage for long enough?
Many lenders require a certain amount of time to have passed on your current mortgage before you can refinance. To learn what that time frame is, you’ll have to double-check with your lender, and if it hasn’t been long enough yet, it may not be possible to refinance.
Should I refinance right now?
One of the most common reasons that homeowners refinance is to obtain a lower interest rate than when they first received their original mortgage. You’ll likely want to check where interest rates are right now to ensure it makes sense for you. Otherwise, you may end up paying more in interest.
Can You Benefit from a Shorter-Term Mortgage?
Refinancing to a mortgage for a shorter term could help you reap potential benefits. The money and time saved from a refinance may be worth the closing costs and higher monthly payments. However, you should ensure that it’ll work for your financial situation and long-term goals. This can be achieved by assessing your current finances and calculating the potential savings of interest over time you’d gain from this type of refinance.
Remember, it doesn’t hurt to speak with a mortgage professional to help ensure you’re making the right decision for you and your family.
Additional disclaimer: Intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
