For some homeowners, it is possible to make a reasonable refinancing decision even when interest rates are stagnant, the homeowner does not have significant equity in the home, and the homeowner’s credit score has not improved significantly. You may be wondering how this is possible. It’s certainly not an option for every homeowner, but those who can afford to pay more each month can benefit greatly financially by switching their loan term from 30 years to 15 years. The potential benefits of this type of refinancing include significant overall savings, the ability to gain equity faster, and the ability to pay off the balance of the loan faster.
Higher monthly payments increase overall savings
Refinancing with a shorter loan term is definitely not an easy option, but if a homeowner has a significant monthly cash flow or has received a sizable promotion at work, it may be worth considering refinancing by reducing the term of the loan from 30 years to 15 years.
The result of this type of refinancing will be a much higher monthly payment, which is not the norm, but can be worthwhile if it meets the homeowner’s needs. In particular, this type of refinancing 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 pay throughout the life of the loan.
Reducing the amount of interest is critical to the overall savings plan because homeowners do not have the option to reduce their original debt, but they can significantly reduce the amount of interest they pay over the course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid in 15 years, while the other loan is to be repaid in 30 years. Obviously, in this example, the homeowner with the 30-year mortgage will pay more over the course of the loan.
Faster equity acquisition
Another major advantage of refinancing by reducing the term of the loan from 30 years to 15 years is the ability to gain equity in the home at a much faster rate. The amount of equity in the home is equal to the amount of the principal loan that the homeowner has already repaid. Under a conventional loan, the homeowner usually makes monthly payments on a combination of principal and interest. If one loan is for a 30-year term and the other is for a 15-year term, the amount of principal repaid will be different for two mortgages of the same amount and at the same interest rate. A homeowner with a 15-year mortgage will pay more principal each month and therefore will build more equity each month. Faster access to home equity is ideal because it gives homeowners more flexibility. Home equity can be used for a variety of purposes, including home improvement projects, travel, educational pursuits and small business investments.
Faster Loan Repayment
One benefit of a shorter loan term is the ability to pay off the loan faster by refinancing from 30 years to 15 years, something some homeowners cannot deny. In this case, the homeowner will fully repay the home loan a full 15 years earlier than under a conventional loan. This is beneficial because it allows the homeowner to enjoy life without a mortgage a full 15 years earlier. Once the mortgage is fully repaid, the homeowner will be able to contribute more to his retirement plan. Some homeowners may even have the ability to retire once the mortgage is fully repaid. This ability can have a significant impact on a homeowner’s quality of life. Homeowners may find themselves with the financial resources to travel, help their families with their education, or invest in a small business.