If you have a 30-year mortgage and are considering refinancing to a mortgage with a shorter length, there are some things you need to consider: Although it might seem like an attractive idea on paper, in actuality, a new mortgage with a shorter life might be difficult to handle for some people. But for those who want to pay their home off faster. build equity quicker or pay less overall interest on the life of the loan, then a refinance to a shorter-term mortgage might be the way to go to accomplish these things.
If you go from a 30-year mortgage to a 15-year, your monthly payment will most likely increase, and for many the increase will be significant. However, if you end up with a much lower interest rate on the 15-year than you had on the 30-year, your payment might not increase much at all. But to be on the safe side, make sure you have the disposable income to handle an increase in the mortgage payments. You will also need to prove a great debt to income ratio. This will show potential lenders that you will be able to handle the increase in the mortgage payment without causing a significant financial hardship.
Staying Put or Packing it Up
If you plan to stay in your home for more than three years, then refinancing downward from a 30-year mortgage is a viable option. If you aren’t planning to stay in the home for a significant period of time, then the closing costs of the refinance might make the change an unwise decision. On a related note, if you are in year 18 of a 30 year mortgage, refinancing to a 15-year mortgage actually adds payment years onto your mortgage, as well as the acquired expense of closing costs.
So, what is boils down to is whether the expense of closing costs for a refinance, coupled with the increase of a monthly mortgage payment is worth having a mortgage with a shorter term. If you have the extra income and your interest rate on your current 30-year mortgage is higher than four percent, then a refinance into a 15-year mortgage is something worth considering. But if the refinance would mean you are struggling to make your monthly payments just for the sake of paying the home off sooner, then perhaps it is not a viable option for you.
There are other options, however. Many lenders offer mortgages for periods less than 30-years, but greater than 15, such as 17, 18 and 20-year mortgages. So, before you commit yourself to a new loan, shop around to different lenders and see what is available. But experts all advise that if you plan to refinance into a shorter mortgage, the time to do it is now. The historic low interests rates are not going to last forever, and if you wait too long and miss the current rates, any savings you might have enjoyed due to locking in a historic interest rate will be lost.