Should I refinance to shorten or lengthen the term?

Posted by  on Jan 05, 2011


Refinancing a mortgage should involve more than finding the best mortgage rates. When comparing home refinance deals, it's also important to choose the best term for your financial situation. When shortening or lengthening the term of a mortgage, consider the following:

  • How long have you been paying on your current mortgage? It's possible that you've been consistently making monthly mortgage payments for 10 years or longer. If that's the case, you've probably paid down a decent amount of principal. Refinancing into a 30-year loan means extending your loan, and you may pay more interest over its life, even if you get a lower interest rate. Consider shortening the term of the mortgage to 20, 15, or even 10 years if you want to pay less interest. However, be prepared for higher monthly payments with a shorter term. You'll need more disposable income to put toward the higher payments, so it's important to make sure other needs are taking care of first, such as funding savings and retirement funds.
  • Do you want to improve your cash flow? Refinancing into a 30-year mortgage may be the best choice if you need to lower your monthly payments. While you will pay more interest over the life of the loan than with a shorter term, having lower payments can give you some breathing room in your budget. And you can always make extra payments to pay down the principal faster when the money's available.
  • Having a paid off home can free you from the stress and worry of making mortgage payments. While some financial experts advise against paying off a mortgage early, it can be a valid strategy as long as your debts are under control and your retirement accounts are fully-funded.
  • The best mortgage lenders are knowledgeable about many mortgage products. Avoid working with anyone who can't explain or justify a mortgage product recommendation. Find out what options are available to you based on you current home equity, credit score, income, and debt-to-income ratio.

Compare mortgages carefully

Shopping for a mortgage should not be rushed. Evaluate the various loan products carefully and use a mortgage calculator to run different scenarios based on the loan term, interest rate, points paid, and other factors.



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