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Refinance Home Mortgage Loans

Mortgage Refinance Guide Step 6: How to Pick a Term Length When You Refinance Home Mortgage Refinance Loans

    Choosing a term length when refinancing can seem like the simplest choice you have. But it's not. Picking the right term length requires much consideration, because the term length you choose will greatly affect how much you pay when you refinance home mortgage loans. So how do you know whether you are a short or long term mortgage person?

People who Refinance Home Mortgage Loans with Short Terms...

    Want their loan to be as cheap as possible. I know what you are thinking, "Yeah right. Short term mortgages have much higher monthly payments."  And you are right.  However, those high monthly payments allow you to pay off your loan quicker, which means you pay less interest over the life of the loan. Which means you will spend less money to own your house.  Choosing a 15-year mortgage over a 30-year mortgage can save you thousands of dollars.
    Getting a short-term mortgage when you refinance home mortgage loans makes sense not just because you can save money, but also because you have already been paying off your current mortgage for at least a few years. If you started out with a 30-year mortgage and have been paying off the mortgage for the past 9 years, then you only have 21 years left.  Why get a new 30-year mortgage that will elongate the number of years you have to make monthly payments? You may find out that you will actually loose money even if your new mortgage has a lower interest rate because you will be paying more interest payments than you would if you kept your current mortgage. Therefore, it's smart for people to refinance home mortgage loans with new short-term mortgages if they are refinancing to save money. 
    In addition to saving money through interest costs, another benefit of getting a short-term mortgage is that they often have lower interest rates, which means you could save even more money (Garton-Good 73). Talk about a good deal if you can make the monthly payments without being too stressed.

People who Refinance Home Mortgage Loans with Long Terms...

    Want to lower their monthly payment. When you refinance home mortgage loans with long term mortgages, you are extending the time it will take for you to repay the money you borrowed. Therefore, your monthly payments will be lower than your original mortgage.  To better understand this, let's say you have 21-years left to pay $200,000 on your current mortgage. You would keep your current mortgage, but you just received a reduction in your income. Instead of having to move to a smaller house, you decide to refinance your current mortgage with a new 30-year mortgage. Instead of having to repay the $200,000 over the span of 21 years, now you have 30 years to repay the money.  Therefore, your monthly payments are smaller than on your first mortgage.
But what about People who can't Afford a 15-year mortgage but Don't Want a 30-year mortgage?

    After paying off their mortgage for a few years, people who refinance home mortgage loans may find they want a term-length that doesn't exist. For example, say you are refinancing your mortgage to save money by getting a lower interest rate. You have only 21 years left to repay your mortgage and can't afford the monthly payments on a 15-year mortgage. So naturally you want to get a 21-year mortgage because you are comfortable with the monthly payments you currently have. Unfortunately, most banks don't give out 21-year mortgages (Guttentag 237). Then what do you do?
    Your best bet is to get a 30-year mortgage and prepay your mortgage (Guttentag 237).  Every month, you should pay more than you are expected to pay.  After years of paying extra each month, you will be able to pay off your mortgage in the 21 years you had hoped for if you budget correctly. The major benefit of prepaying your mortgage is that you will save tons of money in interest cost. If you plan on prepaying, make sure you are very disciplined. Otherwise you may slip a few tips and only pay what is required of you. After awhile those slips will become a habit. So if you are going to prepay make it a routine you never break.

Mortgage Refinance Guide Sections:


Garton-Good, Julie. All About Mortgages. United States: Dearborn Trade Publishing, 2004.

Guttentag, Jack. The Mortgage Encyclopedia. Madison: McGraw-Hill Professional, 2004.