Re-Financing with Shorter Loan Terms. Interesting Things to Consider
Finance August 12th, 2009For some homeowners there is the possibility of making a sound re-financing decision even when interest rates are stagnant, the homeowner does not have a great amount of equity in the home and the homeowner’s credit score has not enlarged considerably. You might wonder how this is possible. It certainly isn’t the opportunity for every homeowner but those who can afford to pay considerably more each month can yield huge financial benefits by refinancing their loan terms from 30 years to 15 years. The benefits which may result from this sort of re-financing include a significant overall savings, the ability to gain equity faster and the ability to repay the balance of the loan quicker.
Higher Monthly Payments Increase Overall Savings
Re-financing with shorter loan terms is certainly not an easy choice but homeowners who have a large monthly cash flow or who get a sizable promotion at work might be able to take into account the possibility of re-financing by decreasing the loan terms from 30 years to 15 years.
The result of this category of re-financing will be a significantly higher monthly payment which is not conventional but can be advisable if it meets the needs of the homeowner. In particular this category of re-financing option is a practical way out if the homeowner can afford the increase in monthly payments and has an overall aim of reducing the amount of interest they will pay over the course of the entire loan.
Reducing the amount of interest is critical to the overall savings plan for the reason that the homeowner does not have the option of reducing their original debt but they can significantly diminish the amount of interest paid over the course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid over a period of 15 years while the other loan is to be repaid over a period of 30 years. It is clear that in this example, the homeowner with the 30 year mortgage will pay more during the course of the loan.
Equity Gained Quicker
A different major advantage to re-financing by reducing the loan terms from 30 years to 15 years is the ability to gain equity in the home at a radically faster rate. The amount of the equity in the home is equal to the amount of the principal loan which has already been repaid by the homeowner. Under a conventional loan, the homeowner usually pays a combination of principal and interest with their monthly payments. The amount of the principal which is repaid on two mortgages for the same amount and with the same interest rate will be dissimilar if one loan is a 30 year term and the other is a 15 year term. The homeowner with the 15 year mortgage will be paying more of the principal each month and will then be accumulating more equity each month. Gaining equity in the home quicker is ideal for the reason that it gives the homeowner greater flexibility. The equity in the home can be used fornumerous purposes including home improvement projects, travel, educational pursuits and small business ventures.
Loan Repaid Quicker
One advantage of shortening the loan terms, which cannot be denied by some homeowners, is the ability to repay the loan quicker by re-financing to shorten the loan terms from 30 years to 15 years. In this case the homeowner will have wholly repaid the home loan a full 15 years earlier than they would have under the conventional loan. This is beneficial for the reason that it can enable the homeowners to take pleasure in living mortgage free a full 15 years earlier. Once the mortgage is completely repaid, the homeowner may be able to make considerably more sizable contributions to his retirement plan. Some homeowners may even be able to afford to retire after their mortgage is repaid in full. This ability can have a significant effect 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.
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