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

September 6th, 2012

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.

Should You Refinance to Get a 15-Year Mortgage?

December 31st, 2009

Mortgage refinance rates have edged up recently but are still low enough for many people to apply for a loan. If you’ve been paying on a home loan for several years, refinancing to get a 15-year mortgage can help you pay off your home quicker. But should you do it?

Lower Mortgage Rates

Mortgage loans with a 15-year term have lower mortgage rates than 30-year loans. That means you end up paying less interest over the life of a loan. For instance, 30-year fixed  mortgage rates are averaging 5.14%, while 15-year fixed loans are averaging 4.54%, according to Freddie Mac.

High Monthly Payments

But refinancing into a 15-year loan from a 30-year mortgage usually means your monthly payment is going to rise. For example, a 30-year mortgage  for $200,000 with a 5.14% rate would have monthly payments of $1,090.82, while the same amount for 15 years at 4.54% would have monthly payments of $1,534.08. Use a mortgage payment calculator to run different scenarios for interest rates and terms.

More Homeowners Refinance for 15 Years

Despite the higher payments, 15-year mortgages are popular these days. About one in five mortgage refinancings in November were for 15-year mortgage loans, according to the Mortgage Bankers Association. “My general advice is homeowners who have 30-year mortgages — and they’ve been in them for 3 or 4 years — it’s prudent not to go back into a 30-year mortgage,” Amir Syed of American Street Mortgage told CBS2.

Mortgage Principal and Interest Payments

Most of your mortgage payments go toward interest in the early years of amortization. So if you already have a 30-year home loan and refinance for another 30 years, you end up starting over again with most of your payments going toward interest.

It’s important to discuss all the numbers with your mortgage lender to determine if it really makes sense to refinance. Use the refinance savings calculator to determine if you can save money by refinancing and how long it is going to take to recoup the cost of refinancing.

Financial Freedom

For many people paying off their home represents true financial freedom. A 15-year mortgage is one way to reach this goal quicker, although you may have to make some sacrifices in your monthly budget to afford higher mortgage payments.

You can get free, no obligation mortgage refinance quotes here to determine if a 15-year loan can help you.

Refinance with Low Closing Costs

November 25th, 2009

Some lenders have offered existing mortgage loan customers the chance to refinance with low closing costs. Does that mean you should jump at the chance to do a mortgage refinance if your bank offers such a deal?

Saving Thousands in Mortgage Closing Costs

Depending upon your mortgage loan and the interest rate being offered, there could be the potential to save a lot of money upfront when refinancing. For example, Valley National Bank, based in New Jersey, has been advertising for months a mortgage refinance for a flat fee of $499. Refinancing doesn’t require an appraisal or various other fees common to mortgage closings. The bank says you can save up to $2,000 in fees by refinancing.

Consider Other Factors Before Refinancing

If you’re thinking of refinancing through a similar mortgage program, it’s important to look beyond the closing costs, however. You should factor in how long you have to pay off your current mortgage. Most of the monthly payments go toward interest during the early years of a mortgage. If you’ve been paying on a mortgage loan for many years, it’s important to look at how much money gets put toward interest on a refinanced loan.

Are You Planning to Move?

It may not make sense to refinance if you plan to move soon. Sure the housing market isn’t doing so hot right now, but that doesn’t mean you won’t be able to sell your property in a couple years. It won’t take as long to break even on lower closing costs for a refinance, but getting a new mortgage loan seem like a wise move at this point?

Lower Your Mortgage Payments

Talk to several mortgage lenders to compare deals, even if they involve higher closing costs. Begin searching for mortgage refinance quotes here.

In some cases, refinancings that involve low closing costs may have higher mortgage rates than loans that involve more fees. But if you can significantly lower your monthly payments and are happy with other terms of a mortgage refinance deal, why not go for it? Refinancing into a fixed-rate loan also can give you more financial stability.

Low Mortgage Rates 

Current mortgage rates are very competitive overall. Refinancing could be one way to cut your monthly expenses and save more money in this tough economy. Just make sure you consider a mortgage refinance from all possible angles to avoid any problems later.

Refinancing a Mortgage? Don’t Forget “Consolidation and Assignment”

December 29th, 2008

This blog isn’t really supposed to be about tips, and hints. But, a couple of days ago, the New York Times gave such a good piece mortgage advice that I just have to pass it on. Read the rest of this entry »

Mortgage refinancing: an essential step toward real estate recovery

December 24th, 2008

On Monday, I wrote about last week’s figures from the Mortgage Bankers Association. It looked, I said, as if current record rates were boosting loan applications, which were 37.3 percent up on the same week last year.

However, I went on to say that more than three-quarters of all applications had come from those seeking to refinance existing mortgages, and that that might not be such good news.

I haven’t changed my mind. In an ideal world—or even just in a healthy market—there would be a whole lot more people wanting new mortgages, and many fewer wanting to re-engineer their existing ones.

But we already know that the market is not healthy. In fact, it is just the opposite. And, like any invalid, it has to take baby steps before it starts thinking of running anywhere.

Refinancing is just such a baby step. People have to rediscover their confidence before they start trading up or entering the real estate market. And that means an extended period of stability along with much lower repossession, and hardship rates.

We’re getting there. But it’s going to take a while.

In the meantime, I hope you have a very happy holiday.

Mortgages: Yet More Good News for Borrowers

December 22nd, 2008

Freddie Mac unveiled yet more good mortgage news for borrowers on Friday in its weekly survey of average rates. The figure for a 30-year loan was 5.19 percent, which the Wall Street Journal says is the lowest since records began in 1971, 37 years ago. New 15-year mortgages were averaging 4.92 percent.

The Journal also pointed out that mortgages generally closely track long-term government notes, and that these are also continuing to decline. This means that there’s every reason to expect mortgage rates to continue their downward trend.

All of this positivity is translating into a much larger volume of mortgage applications. The Mortgage Bankers Association reports that these are up 37.3 percent up on the same week last year. However, refinancing represents 76.9 percent of all activity, which may not be quite such good news.

More on that soon.

Mortgage News Reflects Conflicting Philosophies About Debt

December 11th, 2008

This week’s mortgage news reflected something of a tug-of-war about what consumers should be doing in the face of the recession:

The first two items reflect the hope that consumers can be induced to start borrowing enough to spend their way out of recession. The second two items reflect the grim reality that underlying this recession is a debt problem that has to be addressed before the economy can get healthy again.

Read the rest of this entry »

Highlights, Lowlights, and Reading Between the Lines of Mortgage News

July 31st, 2008

Mortgage news was dominated by two items this week:

On the surface, the first would seem to be a highlight, and the second a lowlight, of the week’s mortgage and housing news. Reading between the lines, though, reveals that the first item may not be as good as it’s been reported, but the second item may not be as bad.

Read the rest of this entry »

New Home Buyers Need to Focus on Forward Mortgage News

July 24th, 2008

With all the mortgage news coming out these days, it is important for new home buyers to distinguish between stories which primarily affect existing home owners and borrowers, and those which will impact future buyers.

As an example of the range of stories over the past week:

New home buyers should have a different take on these stories than the angles widely reported by the media.

Read the rest of this entry »

Jump in Mortgage Rates Overshadows Rebound In Application Activity

June 12th, 2008

A sharp jump in mortgage rates was the week’s most significant development.

Read the rest of this entry »