Re-Financing with Shorter Loan Terms. Useful Points to Know

Posted on July 24, 2009
Filed Under Refinance | Leave a Comment

For some homeowners there is the option of making a sound re-financing decision even when interest rates are stagnant, the homeowner does not have a great amount of equity in the home and the homeowner’s credit score has not enlarged drastically. You might wonder how this is possible. It surely isn’t the selection for every homeowner but those who can afford to pay considerably more every month can yield huge financial benefits by refinancing their loan terms from 30 years to 15 years. The benefits which may result from this kind of re-financing involve a significant overall savings, the ability to gain equity more rapidly and the ability to repay the balance of the loan faster.

Higher Monthly Payments Increase Overall Savings

Re-financing with shorter loan terms is certainly not an easy option but homeowners who have a great monthly cash flow or who get a sizable promotion at work might be able to consider the possibility of re-financing by decreasing the loan terms from 30 years to 15 years.

The result of this kind of re-financing will be a significantly higher monthly payment which is not conventional but can be worthwhile if it meets the needs of the homeowner. Specially this type of re-financing option is a practical way out if the homeowner can afford the increase in monthly payments and has an overall purpose of reducing the amount of interest they will pay over the course of the entire loan.

Reducing the amount of interest is critical to the overall savings plan since the homeowner does not have the option of reducing their original debt but they can drastically decrease the amount of interest paid over the course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid over a period of 15 years while the other loan is to be repaid over a period of 30 years. It is understandable that in this example, the homeowner with the 30 year mortgage will pay more during the course of the loan.

Equity Gained Quicker

Another key advantage to re-financing by reducing the loan terms from 30 years to 15 years is the ability to gain equity in the home at a considerably faster rate. The amount of the equity in the home is equal to the amount of the principal loan which has already been repaid by the homeowner. Under a conventional loan, the homeowner naturally pays a combination of principal and interest with their monthly payments. The amount of the principal which is repaid on two mortgages for the same amount and with the same interest rate will be different if one loan is a 30 year term and the other is a 15 year term. The homeowner with the 15 year mortgage will be paying more of the principal every month and will therefore be accumulating more equity each month. Gaining equity in the home quicker is ideal since it gives the homeowner greater flexibility. The equity in the home can be used formany purposes including home improvement projects, travel, educational pursuits and small business ventures.

Loan Repaid Quicker

One benefit of shortening the loan terms, which cannot be denied by some homeowners, is the ability to repay the loan quicker by re-financing to shorten the loan terms from 30 years to 15 years. In this case the homeowner will have completely repaid the home loan a full 15 years earlier than they would have under the conventional loan. This is beneficial since it can enable the homeowners to enjoy living mortgage free a full 15 years earlier. Once the mortgage is fully repaid, the homeowner may be able to make considerably more sizable contributions to his retirement plan. Some homeowners may even be able to afford to retire after their mortgage is repaid in full. This ability can have a significant effect on the quality of life for the homeowner. Homeowners may find themselves with the financial means to travel, aid family in educational pursuits or invest in a small business.

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