Refinance Into a Shorter Term

Refinance for Long Term Savings

Refinance for Long Term Savings

A refinance into a lower term is often a homeowner’s best option when it comes to refinancing their Arizona home loan.  Now or Later?  This is a question every homeowner needs to ponder when considering a mortgage refinance.  The homeowner needs to say to themselves – “self, do I want to save money now or do I want to save money later?”  In today’s “I want it right now” society most people will want to save money right now.  At first glance you might be saying – why wouldn’t that be the right answer?  Let’s dig a little deeper to find out why that might be the WRONG answer.

1. Refinance into a 30 year term you have on your loan at a lower rate  (save now)   OR
2. Refinance into a shorter term loan – ex: a 20 year term- (save later)
*note shorter terms also typically offer a lower rate

Lower Rate/Save Now Vs. Shorter Term/Save Later

If a borrower lowers their rate and stays in the same 30 year loan term (option #1 above) they will see an improvement in their Arizona mortgage payment immediately.  However, if a borrower is not in need of a lower payment and they want to find a way to save money over the long-term on their Arizona mortgage than option #2  above is the way to go.  A refinance into a shorter term mortgage will typically save a Phoenix homeowner more money over the life of the loan when compared to just lowering the rate and keeping the same 30 year term.

Refinance Into a 15 Year Home Loan

In order to show the true impact when a homeowner completes a refinance into a shorter term, let’s take a look at two samples – a case study if you will.  For fun, let’s assume the following:

Hank the Homeowner
Current Mortgage Balance: $250,000
Current Mortgage Rate: 5.5%
Current Mortgage Term: 30 Year Fixed
Current Monthly Payment (principal and interest): $1,419 

OPTION 1: Refinancing into a 30 year fixed mortgage at a lower rate:

Refinance Rate: 4.5% (APR/Annual Percentage Rate: 4.611%)
New Mortgage Balance: $248,000
Loan Term of the New/Refinanced Mortgage: 30 Years/Fixed Rate

New Lower Monthly Payment (principal and interest): $1,266
Monthly Savings: $156
Total Principal and Interest payments over the life of the loan: $455,760

OPTION 2: Refinance into shorter term/a 20 year fixed mortgage at a lower rate:

Refinance Rate: 4.125% (APR/Annual Percentage Rate: 4.377%)
New Mortgage Balance: $248,000
Loan Term of the New/Refinanced Mortgage: 20 Years/Fixed Rate

New Monthly Payment (principal and interest): $1,531
Monthly Payment Difference compared to original loan: $112
Total Principal and Interest payments over the life of the loan: $367,440

Over the life of the 20 year loan you would save $88,320 compared to the 30 year refinance option.  This is the answer to the “now or later” question that needs to be asked.  Do you want to save $112 per month now OR $88,320 later/over the next 20 years.  Keep in mind, the $88,320 savings includes the additional $226 per month you would pay for the 20 year refinance option compared to the 30 year option.

Tortoise and the Hare Mortgage?

It’s called delayed gratification – not America’s favorite concept.  If a homeowner does not need additional cash flow now, cutting the term of a home loan may prove to be a much better option.  Paying a mortgage off years earlier  by completing a refinance into a shorter term can save an Arizona homeowner thousands and thousands more than a simple rate reduction refinance.  If you are refinancing, make sure to look at all your options and resist the urge to jump into a rate reduction refinance.

By Jeremy House
Google

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