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Time to Refinance to a Shorter-Term Mortgage?

Planning Your Future Owning a Home

Your budget is set. You’re comfortable with your monthly mortgage payments. You’re steadily paying off your loan and building equity. Life is good.

But maybe you have a little wiggle room—your take-home pay has grown, you finally eliminated that pesky debt, or you’ve drastically cut back on material purchases. Can you dedicate a little more toward your mortgage each month?

Mortgage rates have risen slightly early in 2021 but are still at historical lows and are projected to stay low. Because of that, many homeowners are rushing to refinance their 30-year mortgages into 15-year loans. At SELCO, 15-year fixed rates dipped to 2.5%. Before the abrupt economic shift in 2020, SELCO Mortgage Manager Mike Lavender considered 3% to be the “glass floor.” In other words, rates don’t fall below 3% all that often, like they started doing in 2020.

House with coins and bags of money

"The 15-year mortgage is so appealing right now,” Lavender said. “Not only are the rates super low, the idea of paying down your loan significantly faster and building more equity quicker really makes it attractive.”

If you can swing it, there’s no better time to refinance to a shorter-term loan. Here’s why.

Quicker payoff, thousands in savings

The primary attraction of a shorter mortgage term is paying off your home loan sooner and building equity quicker while enjoying considerable savings. So, let’s crunch some numbers, shall we?

Let’s assume you have a fixed 30-year, $300,000 mortgage with an interest rate of 3.875%. If you kept your existing mortgage unchanged for 30 years, you would make 360 payments of $1,410.71 per month, not including taxes, insurance, and other fees. Over the life of the loan, you will have paid $207,855.60 in interest.

Now, what would your payments look like if you refinanced to a 15-year, fixed-rate loan at 3.0%? Over 15 years, you would make 180 payments of $2,071.75 (again, not including taxes, insurance, or other fees). Over 15 years, you’d pay $72,914.08 in interest, which is $134,941.52 less than what you’d end up paying on your 30-year mortgage. And we’re only talking interest savings. (Think of the savings if you were fortunate enough to get a loan at 2.5%.)

"You also need to factor in cash-flow savings,” Lavender said. “When you end up paying off your mortgage 15 years ahead of schedule, what are you going to do with that extra $2,000 per month? The overall savings is a big number when you see it."

Of course, these numbers may not translate to your situation. These savings are calculated using the full 30-year and 15-year terms, respectively. If you’ve been in your home for 5-10 years, for example, refinancing at a lower rate may still be a good idea, but your interest savings will be less than described above. However, even if you made the switch to a shorter term and decided to sell your home after a few years, you’d still owe less on your loan because of the extra amount you’ve dedicated going toward principal, resulting in more money to use moving forward.

How much will a refinance cost?

Any time you get a mortgage—even when refinancing an existing one—there are costs involved. It’s a balancing act as title insurance, appraisals, and other costs upfront need to be considered. You may be able to fold these into the loan, but think carefully about the costs involved. It’s best to tally up these expenses beforehand to see what it would truly cost to refinance.

Using the example above, your monthly payment would increase by nearly $600 by refinancing from a 30-year to a 15-year loan. That’s significant. If the higher payment feels like too much, SELCO has alternative terms of 20 and 25 years, for which your monthly payment would only go up slightly. Make an appointment today with one of SELCO’s Loan Officers to learn more.

“We have a little blip in the rates right now,” Lavender said. “Even if you locked in to a 30-year mortgage in, say, August 2019 (when rates were higher), if you refinance to a 20-year loan with a slightly higher payment per month, you could potentially knock more than nine years off your loan.”

How does that sound? If you’re in position to commit a little more toward a monthly mortgage payment, refinancing to a shorter-term loan may be just what you need. Think of the savings down the road.

Maybe paying extra is not in the cards right now. Fortunately, SELCO still might be able to help you lower your payments by just refinancing your current loan.

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