If paying off debt as quickly as possible tops your list of financial goals, consider taking advantage of low interest rates and refinancing to shorten the length of your mortgage loan. By shaving years off a 25- or 30-year loan and converting to a 15-year commitment, you avoid paying thousands of dollars in interest. Here's what to expect when you shorten the length of your home loan.
Support your debt-reduction plans with a shorter term
Cutting the amount of time to pay off your mortgage by one-third or one-half may mean you are mortgage-free by retirement. Better yet, shortening the payment period can help with debt, because you will pay significantly less in interest over the life of the loan. You'll also build equity faster, which can also give you the option of drawing on a home equity line in the future.
Caveats to consider when refinancing
The prospect of low interest rates may be powerful incentive to refinance, but before you make a commitment to a shortened loan term, ask yourself the following questions:
- Are there prepayment penalties? Check with your lender to make sure that you won't have to pay fees for paying your loan off early.
- Inquire about closing costs. While the lowest closing costs possible are ideal, one of the benefits of taking out a shorter term loan is that what you save in interest often far outweighs any costs to refinance.
- Can you afford the higher monthly payments? Analyze your financial circumstances to make sure that this is a wise financial move. If the new higher mortgage will create a budget shortfall every month, are there nonessentials you can cut to make up the difference?
- Have you considered all of your options? If moving from a 30-year loan to a 15-year commitment will cause undue financial stress, ask your mortgage specialist to give you the numbers on a 20-year loan, which may be more realistic for your budget and still offers substantial interest savings.
When the timing and circumstances are right, refinancing to a shorter term mortgage could jumpstart your debt-reduction plans.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.