Should you refinance for a shorter-term loan?
New home buyers often choose to take out longer term mortgages such as a 30 year term on their new homes due to the security and peace of mind that a consistent monthly mortgage payment provides. However, a few years into the mortgage many start to realize that a 30 year term is a really long time. It is especially long when they have to start thinking about things like putting their kids through college or saving for retirement. The low interest rates that have been typical throughout this year have many home owners refinancing their mortgages at a lower interest rate. However, these historic low rates have also seen home owners securing shorter term loans.
Paying off your mortgage sooner will free up a lot of cash that can be used for other upcoming commitments. It also means you will save money in interest over the life of your loan because you are paying down your mortgage significantly faster. But can you really afford to do it?
People who have a steady and reliable income are prime candidates for mortgage refinancing because they can afford the bump in expense that a shorter term loan will most likely bring. For example, a 30 year loan of $100,000 at 4.5% would cost roughly $506 per month (principal and interest). A 15 year loan at the same rate would be approximately $765. For home owners who currently already have some extra disposable income at the end of the month the $259 increase between the two terms would be manageable. However, a higher debt to income ratio would be required on the 15-year term because of the higher monthly payments.
Refinancing a home for a shorter term makes sense for those home owners who have an interest rate of 4% or higher and who have not refinanced in the past six months. It also makes sense for people who are looking to build equity in their home sooner.
Is there an option for home owners who don’t meet the criteria to refinance? For those home owners who are afraid of committing to a larger monthly payment or who can’t meet the new income to debt ratio that the shorter term requires, they can still get the same benefits by consistently paying extra on the principal of their mortgage. Another option might be to see if their lender offers a variety of shorter terms such as 18 or 20 years instead of 15 or 10.
There are many things to consider when refinancing a home. However, with today’s attractive low rates it is definitely something worth thinking about.
Aurora Financial, a leading financial services company, has funded billions of dollars in loans across the United States and serves clients nationwide in more than 18 states and jurisdictions. A Direct DE FHA Lender, Aurora provides a broad range of financial products and services, including consumer banking and credit, corporate and investment banking. Contact us www.auroraf.com or call 1- (877) 887-1117 to find out if refinancing your home loan to a shorter term makes sense for you.