Thinking 30 years out has real advantages

Posted by  on May 17, 2013

During the fourth quarter of 2012, only 4 percent of mortgage borrowers opted to lengthen their loan term; but another 69 percent kept the same loan term, according to Freddie Mac. While that loan term could be any length of time, many borrowers with a 30-year, fixed-rate loan chose to refinance into another 30-year mortgage loan.

The benefit of refinancing to a shorter loan term and taking advantage of current mortgage rates includes reducing the amount of interest you would pay throughout your loan term and paying off the mortgage in full faster. But switching from a 30-year loan to a 15-year loan will usually mean your monthly mortgage loan payments are higher. How much higher depends on the size of your loan balance, with a smaller balance incurring less of a payment jump. In addition, your payment change will depend on the difference in your interest rate. For example, if you are lowering your interest rate by two points, that means your payment shock may not be as high compared to lowering your interest rate by .5 percent.

Before you jump on the shorter loan bandwagon, consider the following reasons you may be better off with a 30-year mortgage.

4 reasons to refinance with a new 30-year loan

1.Improve your cash flow. If your income has been reduced, you need to pay down credit card debt, or you have tuition payments to make, refinancing into a lower interest 30-year mortgage loan can reduce your monthly payments so you can divert more money to your other needs. Be sure to calculate the cost of your refinance and your new monthly payments to make sure a refinance makes financial sense.

2.Keep your payments low pre-retirement. While some homeowners nearing retirement age want to switch to a shorter loan term so they can be debt-free faster, you may want to lower your mortgage payments so you can direct more cash into your retirement investments. If you retire before your mortgage is paid, lower payments can be easier to handle.

3.Hang onto your mortgage interest tax deduction. Depending on the size of your mortgage interest payments and your tax bracket, paying off your loan early could have a significant impact on your tax bill. You may want to keep that tax deduction longer with a longer loan term.

4.Allow flexibility for your loan repayment. Even if you can afford the higher monthly payments of a shorter loan term, you may prefer to refinance for lower payments in case your income is reduced or other bills increase. You can always make additional payments to your principal balance to pay off your loan faster when you can afford them.

Consulting with a loan officer to compare loan terms and monthly payments can help you clarify your refinancing decision in the context of your other financial goals.

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