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Refinancing? Cut your term at the same time — and save a small fortune

You may be interested to refinance your current mortgage in order to save money. But for those with sufficient disposable income, an even greater savings could be achieved by also cutting the term of the mortgage.

With current mortgage rates so low, it’s easy to overlook just how interest payments add up. If you can afford to halve the term of your home loan from 30 years to 15 years, you stand to save tens of thousands of dollars. Using LoanBiz.com’s Payment and Amortization Loan Calculator, you can see just how big these savings could be for you.

Mortgage refinancing + shorter term = huge savings

Suppose you want to refinance a $150,000 mortgage. At a mortgage rate for 30-year fixed loans of 3.29 percent, your monthly payment would be $656.11 and the total amount of interest you would pay over the life of the loan would be $86,198.53. Your house would end up costing $236,198 when you finished paying for it.

But if you shorten the term to 15 years, the mortgage rate drops to 2.72 percent. Even though your monthly payment would be nearly $360 higher at $1,015.79, the total amount of interest you would pay over the life of the loan would be just $32,842.65 — approximately 60 percent less. Your house would cost only $182,842 when you finished paying for it. That’s a savings of over $53,000.

In addition, by shortening your term in this way, you would be free of all mortgage payments in 15 years, and that means you could invest all the money you would otherwise be paying out on your home loan in ways that could seriously improve your retirement.

Mortgage loans and tax relief

When covered this topic for The Los Angeles Times in August 2012, he comprehensively demolished the argument that it’s worth paying mortgage interest because you get tax relief on it. He made two important points:

  1. Your deduction is only worth whatever your tax bracket is. So, if you are paying 15 percent tax, you’re still paying 85 cents of every dollar you spend on mortgage interest out of your own pocket.
  2. There is no guarantee (in spite of what many politicians are saying today) that mortgage interest is going to remain deductible.

Clearly, reducing the term of a mortgage isn’t for everyone. But if you can afford to do so, it may be a good time to explore your options.

Peter Andrew

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

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