Should You Shorten Your Mortgage Term When Refinancing?
Refinancing a home loan in Florida can be a viable decision to achieve strategic goals. The most common ones are getting a lower interest rate, avoiding rate adjustment, tapping equity, and dropping the private mortgage insurance.
Shortening the term of your loan is also an option. Any mortgage lender in Naples, Marco Island, and Everglades City will say that this motivation is not that popular, though, for it almost always translates to lower monthly payments. Although switching from a 30-year loan to a 15-year one has its drawbacks, it is practical if you are playing the long game.
Owning Your House Free and Clear More Quickly
Applying for a mortgage refinance without changing your 30-year term is tantamount to agreeing to pay your home loan for more than 30 years.
Generally, you can take out a refi penalty-free three years from the date you consummated your current mortgage. If you take this route, you will end up paying what you owe to buy a house for 33 years, provided that you never refinance again. If you wait a long time, your total mortgage repayment period will further extend too.
There are many benefits to paying your off your mortgage ASAP. It allows you to live in your house free and clear come retirement. Since your income also will likely go down when you stopped working, not worrying about your mortgage debt during your sunset years can give you peace of mind.
Minimizing Total Interest Payment
In a fully amortized 30-year mortgage, most of the interest gets paid first before the principal. Your payment monthly might be the same, but the payment composition is not. It is structured this way to decrease the potential loss your lender or the owner of your debt might absorb when your default on your loan.
Refinancing can decrease your mortgage rate, but it does not necessarily guarantee interest savings unless you switch to a shorter term. A refi will reset the clock of your mortgage, so most of your payments will once again be applied toward the interest in the majority of the first half of your new loan’s term.
Taking out a 15-year mortgage via a refinance is the only way to save on interest. It will increase your monthly payments, but it also allows you to reduce your principal balance more quickly.
Accelerating Home Equity Buildup
The speed of home equity growth depends on various factors, but one of the few you can control is the principal reduction. As mentioned, you can accelerate the shrinkage of your principal balance if you pay more per month.
You can reduce your principal mortgage fast without asking for a 15-year term. Extra payments, especially lump-sum ones, can slash what you owe significantly to build equity on your property more quickly and also save some on interest in the process.
However, a 15-year term makes a useful bargaining chip to negotiate for an even lower mortgage rate. Besides, you have the liberty to pay off your refinanced loan early without any fee as long as you follow what is spelled out in your prepayment penalty clause.
A 15-year home loan might not be advisable if you have a limited income. If you have the means to handle more significant mortgage payments in the next 180 months, strongly consider asking for a shorter term.