More on refinancing

ReFinancing for Shorter Loan Term

In some situations even if interest rates have not had singificant changes, homeowner's credit ratings have not changed and the homeowner has not accumulated singificant equity in his home refinancing can be the right decision . If a homeowner can afford to make higher monthly mortgage payments he can shorten his loan term and achieve significant savings in terms of interest payments as well as other benefits. It certainly is not the refinancing choice for everyone but for those who can afford it shortening loan term, say, from 30 to 15 years will result huge financial befits such as lower interest cost, abiliy to quicker gain equity as well as the ability to repay the loan quicker.

Higher Mortgage Payments Result Savings

Homeowners who have a large enough monthly cashflow may want to consider refinancing their home for a shorter loan term.

Refinancing and changing loan terms from 30 to 15 years would result very significant savings, but depending on the lender shorterning loan term to less significant degree, say to 25 or 20 years can also result fairly significant benefits.

If a homeowner will choose this type of refinancing he will end up with a larger that usual monthly payment, but if homeowner can lift it it will be worth while. As end result while paying higher monthly installments the homeowner will end up paying less in interest charges over the whole loan period.

Here is a a more descriptive example of how shorterning loan term can help to save on total interest charges (example for demonstrative purposes only): a 100 000 dollar mortgage at 6% for 15 years will result about 845 dollar monthly mortgage payment and total interest charges over 15 years of about 52 000 dollars. Same mortgage at the same annual rate for 30 years will have a monthly payment of about 500 dollars, but total interest paid over 30 years will equal about 115 000 dollars!

Gaining Equity Quicker

One other advantage of refinancing to reduce loan term is possibility to increase the rate at which the equity on the home is gained. Amount of equity is the amount of the principal of the loan repaid by the homeowner. Normally a monthly mortgage payment is a combination of the principal and interest. Proportion of principal and interest depends on loan terms and amount of equity. Towards maturity of the loan, as equity is accumulated principal portion in monthly payment increases and amount of interest decreases. Also, the shorter the loan term the higher is the principal portion compared to the interest portion, therefore with shorter loan term equity is gained quicker. Again, a quick illustrative example: same loan 100 000 dollars with 6% interests rate. With 30 year term, monthly payment is about 600 dollars, of which first month's payment is about 100 dollars of principal and 500 dollars - interest. Same loan with 15 year term, monthly mortgage payment is 845 dollars, of which principal portion is 345 dollars and interest is again 500 dollars. As loan matures, amount of principal will further increase in comparison to amount of interest and to a greater degree for a shorter loan term.

Quicker Repayment of the Loan

This is one most obvious advantage: by shorterning loan term the loan is repaid quicker. In other words, a homeowner with a 15 year mortgage will repay his home loan in 15 years and will be 15 years loan-free compared to a homeowner with a 30-year mortgage. Living mortgage-free typically has a very significant impact on life style of most people. As normally a mortgage payment represents a significant part of a household's expenses, eliminating this expense can noticably increase homeowner's quality of life in financial sense.

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