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What Are the Benefits of Refinancing to Reduce the Term (Length) of My Mortgage?

What you'll learn: Learn about the pros and cons of refinancing.

EXPECTED READ TIME: 6 MINUTES

What Are the Benefits of Refinancing to Reduce the Term (Length) of My Mortgage? When Is This a Good Idea?

 

A 30-year mortgage may have made sense when you first bought your house. If you were like many aspiring homebuyers, your goal was simply to get in that front door. But now, you’re a seasoned homeowner with more knowledge and experience. Maybe your budget has grown. You’ve run the numbers and want to knock those payments out sooner, saving thousands of dollars in interest along the way.

If you’re feeling motivated to pay off your loan before the original 15- or 30-year term, a refinance to a shorter-term mortgage could be the answer. But what are the home refinancing pros and cons? And just when should you refinance your mortgage– and when should you not? Let’s dig in.

Why refinance your house? 5 benefits of a shorter-term mortgage

Benefit #1: You can pay off your loan sooner

Depending on how far along you are in payments, a term reduction will likely cut years off your loan. That’s years of payments you won’t have to think about. Just be aware a more aggressive payment schedule means your monthly payment will likely be higher than before. And you can’t revert back to your previous schedule if you have trouble making the new payments.

Benefit #2: You may get a lower interest rate

If you look at a lender’s current rates, you’ll notice that 15-year mortgages are usually lower than 30. That’s because shorter terms are viewed as less risky and also don’t have to take into account inflation over a longer period of time. But if rates have risen since you took out your loan, it may not be possible to get a lower rate.

Benefit #3: You can save money in the long run

If you’ve reviewed an amortization schedule, you’ve seen the true cost of borrowing money. Those interest payments add up! Let’s see how much you can save over the life of a $300,000 loan with four different terms. For simplicity, all options have an interest rate of 5.50%.

Loan Term

Total Paid in Interest

Total Cost (Principal & Interest)

30 years

$313,212

$613,212

20 years

$195,279

$495,279

15 years

$141,225

$441,225

10 years

$90,695

$390,695

As you can see, the shorter terms lead to less interest and a lower overall cost of the loan. The 30-year option actually pays more in interest than the original loan amount does.

Benefit #4: You’ll build equity faster

Equity is how much of your home you actually own. The more principal of the loan is paid off, the more equity you have. Sure, it comes in handy if you want to tap into those funds for a project, emergency, or other need. But the real value is in how equity builds wealth. As your mortgage payments allocate more and more toward the principal, you’re steadily increasing your financial worth.

Benefit #5: A paid-off house opens new doors

If you’ve never been without a housing payment in your adult life, you’re not alone. Imagine your options when you have no more mortgage payments. What will you do with that extra cash each month? Knock out other debt? Put your kids through college? Invest more in retirement? Or how about retiring? Allow yourself to dream about the opportunities and where they can take you.

When should you refinance your mortgage? 3 signs it’s a good idea

Now that you know some benefits of a shorter-term mortgage, is a refinance the right move? Here are three signs it may be a good idea.

Sign #1: You can afford the refinance closing costs and new monthly payment

A refinance replaces your current mortgage with a new one. That means paying closing costs to cover services and fees throughout the process. You can expect to pay between two percent and six percent of the loan for closing costs. And again, it’s important to ensure your new mortgage payment comfortably fits in your budget.

Sign #2: You’re offered a lower interest rate

If you can lock in a lower rate at the same time as a shorter term, you’re on the right track. But if the rate is higher, the same, or just slightly under, be sure to closely examine the numbers to ensure you’re going to save. Ask your lender for an amortization schedule to see how your old and new payments would compare.

Sign #3: You plan to stay in your house for a while

The longer you plan to stay in your home, the more it may benefit you to refinance. You’re paying closing costs and more each month in order to save money down the road. That sacrifice may not make sense if there’s a high likelihood you’ll be moving in the next few years.

You may also like: How to pay off a mortgage faster with a 10-year fixed mortgage

Home Refinancing Pros and Cons

By now, you’ve likely gathered that refinancing to a shorter-term mortgage comes with benefits and drawbacks. Here’s a quick look at the pros and cons we’ve discussed.

PROS

CONS

Pay off your loan sooner

Higher monthly payment

Potential for a lower interest rate

Up-front closing costs

Pay less in interest, saving more overall

Committed to a faster payment schedule

The ultimate question: Should I refinance my mortgage or just pay extra?

If the cons outweigh the pros, refinancing may not make sense for you right now. But it doesn’t mean you’re stuck on your current path. There are other ways to pay off your mortgage sooner, and ultimately, pay less for the loan.

Consider these options to achieve a shorter-term mortgage without a refi:

  • Increase your monthly mortgage payment to what it would’ve been had you refinanced. Essentially, you’re pretending you refinanced, minus the closing costs or commitment to keep up the schedule should you run into financial hardship.
  • Accelerate your payment schedule from monthly to biweekly.
  • Throw any extra funds you receive throughout the year, such as bonuses, tax returns, or income from a side hustle, at the loan principal.
  • Make an end-of-year lump-sum payment to the principal.

Ready to run your numbers?

Start with a refinance calculator.

To learn more about PenFed loans or what loan is right for you:

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