For some homeowners there is the likelihood 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
increased significantly. You might wonder how this is possible. It certainly
isn�t an option for every homeowner but those who can afford to pay
significantly 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 type of re-financing include a significant overall savings, the ability to
gain equity quicker 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 alternative but
homeowners who have a large monthly 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 product of this type of re-financing will be a considerably higher monthly
payment which is not conventional but can be worthwhile if it meets the needs of
the homeowner. In particular this type of re-financing option is a viable
solution if the homeowner can afford the increase in monthly payments and has an
overall goal of reducing the amount of interest they will pay over the course of
the entire loan.
Reducing the amount of interest is essential to the overall savings plan because
the homeowner does not have the option of reducing their original debt but they
can drastically reduce 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
Another 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 significantly 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 typically 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 different 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 therefore be accumulating more equity each month. Gaining equity
in the home quicker is ideal because it gives the homeowner greater flexibility.
The equity in the home can be used for a number of purposes including home
improvement projects, travel, educational pursuits and small business ventures.
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