How to save even more money when you refinanceby April Dykman
Refinancing your mortgage to a lower interest rate to reduce your monthly payment is one way to pay less for your home. In fact, a lower monthly payment is the driving force behind the majority of refinances.
“For most people who want to refinance, the monthly payment is still their number one concern, says Mark Hanley, a mortgage originator at United Lending in Austin, Texas. “It’s definitely their main focus.”
But historically low mortgage rates have prompted more and more homeowners to not only refinance to a lower interest rate, but to a lower term as well. Refinancers can maximize their savings by combining a lower rate with a shorter term, even to the tune of $100,000 or more.
Save more: shorten the term
The main drawback of refinancing to a shorter term is the chance you could increase your monthly payment. However, the interest costs you’ll save over the life of the loan could far outweigh the added monthly difference. For some borrowers, a shorter term could even keep their monthly payment about the same.
“When the payment is practically the same, or even somewhat lower, it’s a no-brainer,” says Hanley.
Over time, shortening the term of your loan saves you more money for three reasons:
No. 1: By going with the shorter loan term, you’ve essentially created “a forced savings plan.”
“The great thing [about a shorter term] is that it’s a forced savings plan” says Eric Mullis, branch manager and senior loan officer with Intercoastal Mortgage Co. in McLean, Va. “We all could pay our 30-year mortgage in 15 years, but no one does that in real life.”
No. 2: You pay off your house sooner with a shorter term.
“Some clients don’t think about the fact that if they’re eight years into their current mortgage, and they refinance into a 30-year loan, they’re basically starting over at 30 years of payments again,” says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich. “That means 38 years of mortgage payments. If they opt for a 20-year loan instead, that’s 10 less years of paying a mortgage.”
No. 3: You save significantly more money over the life of the mortgage.
The money you’ll save in interest payments by refinancing a 30-year mortgage to a 20-year mortgage could save you well over $100,000.
“One of my clients recently went from a 30-year to a 15-year mortgage,” says Mullis. Her monthly payment increased slightly, but the shorter term “basically saved her $150,000.”
Is a shorter term right for you?
Mullis tells clients that when it comes to mortgage terms, there’s no right or wrong answer. “You have to think about what’s going on in your life today,” he says.
Ready to figure out which terms are right for you? Run your numbers with HSH.com’s TriRefi calculator.