Shorten/Extend my Loan Term
Payoff your mortgage faster » Or give yourself more time
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Shorten your mortgage term
Payoff your mortgage early
Most mortgages have 30-year terms. When you add up the interest paid on the loan over those 30-years, it's a significant amount of money. Some people choose to refinance into a 15-year or 20-year term so that they can payoff their home sooner, and simultaneosly reduce the total amount of interest they pay on the mortgage. This aggressive strategy will result in a higher monthly payment during the term, so it's best suited for people that can comfortably afford the higher payments.Example benefits to shortening a mortgage term
Let's say you bought a house 3 years ago and your mortgage was $300,000 at 7.0% on a 30-year term.
The monthly principal and interest payment turns out to be $1995.91. So, if you just keep paying the monthly payment
over the next 27 years, you'll have paid a total of $718,527.60. That's $418,527.60 in interest alone.
On the other hand, if you refinance into a 15-year mortgage at the same 7.0% rate, your new 15-year mortgage
will have a monthly payment of approximately $2,722.73 and your total payments after the 15 years is up will
be $561,944.16 (this includes the payments you already made in the first 3 years).
The end result is that, for a payment that is about $730 higher per month, you will have saved $156,583 in interest,
and will have paid off your house 12 years early if you refinance into a shorter term of 15-years.
* Note that closing costs are not included in this analysis. Usually you have to pay closing costs in a refinance.
** Taxes and insurance were not included in the calculations since they don't change when you refinance.
Extend your mortgage term
Lower your monthly payment
Refinancing your mortgage into a new 30-year term is a way to potentially reduce your monthly payment. Some people decide to do this if money is tight and they don't mind resetting their mortgage term to 30-years. Particularly if they plan to sell the house and move within 5-10 years.Example of extending a mortgage term to lower your payment
Let's say you bought a house 3 years ago and your mortgage was $300,000 at 7.0% on a 30-year term.
The monthly principal and interest payment is $1995.91. After 5 years of making regular monthly payments,
your mortgage principal balance will be roughly $275,000. At this point, you have an opportunity
to refinance into a new 30-year mortgage at 6.0%. If you decide to do this, your new monthly payment
will be approximately $1,649. so, you will have reduced your monthly payment by about $346. On the
downside, however, you've reset your term to 30-years. If you are planning to move or sell the house
in a few years, this trade-off might be acceptable.
* Note that closing costs are not included in this analysis. Usually you have to pay closing costs in a refinance.
** Taxes and insurance were not included in the calculations since they don't change when you refinance.