Home Loans

The Pros and Cons To Refinancing Your Home Loan

The second and certainly less discussed benefit is reducing the amortization period of your loan. When most people refinance they replace a 30-year fixed rate mortgage with another 30-year fixed rate mortgage, which is fine except for the fact that you’ve just started over from scratch and now have 360 payments, again, before your loan is paid off. And while you can certainly make a larger payment each month in an effort to pay off the loan faster, it’s certainly not something that’s done commonly.

If you can make the monthly payment work then refinancing out of a 30-year mortgage to a 15 or 20-year mortgage may make more sense. Your monthly payment will be higher but you’ll be paying off the loan faster. You may have heard the saying that with a 30-year mortgage it takes a few years before you “own the doorknobs.” That’s certainly true because the first several years of your loan you’re paying mostly interest and the actual balance of your loan isn’t moving down much.

A 20-year loan and especially a 15-year loan will allow you to see larger chunks of the balance actually paid off much faster than with a 30-year loan. Even after a few years you’ll see a considerable reduction in the amount you owe. And I can speak from experience that it feels really good to see that balance go down quickly.

But perhaps the most gratifying thing about a shorter loan is the considerably lower amount of interest you’ll pay over the life of the loan. Of course the savings can vary based on the amount of the mortgage but you can save tens of thousands of dollars, or more, by shortening your payback period. The challenge with the shorter payback period is, again, the larger monthly payment and if something goes wrong with your job or family income then you don’t have flexibility to pay less, like you would if you just stick with a longer term 30-year mortgage. Choices choices!!

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John Ulzheimer

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