Re-Financing with Shorter Loan Terms
Although researching mortgages and home loans can be stressful, having a mortgages and home loans to pay each month is indeed a trying experience. But it doesn’t have to be! A popular procedure these days is to look into refinancing your current mortgages or home loans. Refinancing means that you’ll receive a new mortgage rate that better fits your needs. This may include changing to a new type of mortgage, a new type of mortgage rate, and/or a shorter or longer term home loan. This is a great idea if you already have a mortgage but aren’t satisfied with your current mortgage rate or another aspect of your mortgages or home loans.
For a few householders there’s the possibility of making a sound re-financing decision even when rates of interest are stagnant, the householder doesn’t have a great amount of equity in the house and the householders credit score hasn’t increased significantly. You might wonder how this is possible. It certainly isn’t an alternative for every householder but those who may afford to pay significantly more each month may yield big financial benefits by refinancing their loan terms from 30 years to 15 years. The profits which may result from this type of re-financing include a significant overall savings, the power to gain equity quicker and the power to refund the balance of the loan quicker.
Higher every month Payments Increase Overall Savings
Re-financing with shorter loan terms is definitely not an easy alternative but householders who have a large every month cash flow or who receive a sizable promotion at work might be able to consider the possibility of re-financing by decreasing the loan terms from 30 years to 15 years.
The result of this type of re-financing will be a significantly higher every month payment which isn’t conventional but may be worthwhile if it meets the needs of the householder. Particularly this type of re-financing alternative is a viable solution if the householder may afford the increase in every month payments and has an overall goal of reducing the amount of interest they’ll pay over the course of the entire loan.
Reducing the amount of interest is vital to the overall savings plan as the householder doesn’t have the alternative of reducing their original debt but they may drastically reduce the amount of interest paid over the course of the loan. Consider two loans with a 5% rate of interest. One loan is to be refunded over a period of 15 years while the other loan is to be repaid over a period of 30 years. It’s clear that in this example, the householder with the 30 year mortgage will pay more during the course of the loan.
Equity Gained Quicker
Another major advantage to re-financing by reducing the loan terms from 30 years to 15 years is the power to gain fairness in the house at a significantly faster rate. The amount of the equity in the house is equal to the amount of the principal loan which has already been refunded by the householder. Under a conventional loan, the householder typically pays a combination of principal and interest with their every month payments. The amount of the principal which is repaid on two mortgages for the same amount and with the same rate of interest will be different if one loan is a 30 year term and the other is a 15 year term. The householder with the 15 year mortgage will be paying more of the principal monthly and will therefore be accumulating more equity monthly. Gaining equity in the house quicker is ideal as it gives the householder greater flexibility. The fairness in the house may be used for a number of purposes including house improvement projects, travel, educational pursuits and small business ventures.
Loan Repaid Quicker
One advantage of shortening the loan terms, which can’t be denied by some householders, is the power to refund the loan quicker by re-financing to shorten the loan terms from 30 years to 15 years. In this case the householder will have completely refunded the home loan a full 15 years earlier than they’d have under the conventional loan. This is advantageous as it may enable the householders to enjoy living mortgage free a full 15 years earlier. Once the mortgage is fully refunded, the householder possibly able to make significantly more sizable contributions to his retirement plan. Some householders may even be able to afford to retire once their mortgage is repaid in full. This ability can have a significant impact on the quality of life for the homeowner. Homeowners may find themselves with the financial means to travel, assist family in educational pursuits or invest in a small business.