Refinancing a 30-year mortgage on a 10, 15 or 20-year loan will help you pay off your home faster, but will require a higher monthly payment. Or you can find ways to speed things up without refinancing yourself.
Can I pay a higher mortgage payment?
For some homeowners, especially those with young families or for other reasons having cash flow problems, withdrawing a few hundred dollars more from the monthly budget and restricting access to available money can be a risk. Short term loans offer lower interest rates but can go hand in hand with much higher monthly payments. Since missing payments can hurt your credit and put you at risk of losing your home, you need to make sure the larger payments are on a budget.
Even if you are sure you can make larger monthly payments, your debt-to-income ratio should be low enough to show the lender that you can afford it. According to Fannie Mae, a government-sponsored mortgage guarantee company, your DTI should not exceed 36% for most loans, including real estate expenses.
A higher DTI does not necessarily mean that a loan will be rejected, but it is unlikely that you will get the lowest interest rate from a lender. Note that lenders take all of your debts into account when calculating the DTI. If you have a credit card debt or large car payment, be prepared for a higher mortgage rate.
Can I reach my other financial goals?
Refinancing a mortgage for a short term loan can work if you have little long term debt and get enough money each month to pay your bills (with extra money). However, if your budget is tight or you are not contributing to other savings, investing more money in your home may not be an optimal long-term strategy.
Instead of increasing home equity more quickly, it may make more financial sense to use that money in other ways, such as through a college 529 fund, savings accounts, retirement, life insurance, or investments.
How much of my mortgage have I paid?
Depending on the level of repayment on your mortgage, switching to a short term loan can be a costly mistake.
When you refinance an 18-year mortgage with a 10-year loan, you pay more in advance and can lose money.
Amortization means that mortgage payments are charged with interest. For example, if you are in the third year of your mortgage, you pay more for interest than for your principal. However, if you are 18 on your mortgage, you will likely have to pay more for your principal than for your interest. When you refinance an 18-year mortgage on a 10-year loan, you pay more upfront and can lose money if transaction costs and refinancing costs are taken into account.
Do I intend to move in the coming years?
If you plan to stay in your current home for a few more years, refinancing may not save you money. Calculating your savings is not just about the interest rate, but also the cost of refinancing your mortgage. If you divide the total cost of your loan by your savings into monthly payments, you will get the number of months it takes to break even. If you don’t stay home long enough to break even, you won’t see any savings before you move out.
Can I pay my loan faster in another way?
Refinancing is not the only way to shorten your mortgage. With these strategies, you don’t change your interest rate, but you don’t have to pay closing costs. Here are some ways to pay off your mortgage faster without refinancing a short-term loan.
Take your current mortgage payment, divide it by 12, and add this amount to your monthly payment. (Contact your lender and keep an eye on your monthly statements to make sure the extra amount goes to principal, not interest.) If you make these extra payments consistently, you can be 30 years old.