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If you think about the interest costs that will build throughout your 30-year mortgage, it can start to feel like there are better ways to use your money. In the end, you might pay as much interest as you would pay in principal. One path to eliminate these long-term interest costs is to refinance your mortgage and shorten the length in order to pay the interest for less time.
But is it that simple? Let’s dig into the trade-offs of short-term mortgages compared to long-term ones, as well as how to determine if shortening your loan will make your home more affordable.
What effect does term length have on a mortgage?
With a longer-term mortgage, such as a 30-year loan, you’ll likely pay a higher interest rate. Because you’ll need to pay the loan for a longer amount of time, you’ll also pay more interest costs over the lifetime of the loan, causing overall higher costs.
Having longer to pay the balance of the loan, though, makes your monthly payments lower than a short-term mortgage, making it more sustainable for many homeowners.
A short-term mortgage, such as a 10- or 15-year loan will likely have a lower interest rate. Because the balance of the loan gets paid in a shorter amount of time, the overall interest paid will also be lower than a long-term loan.
The flipside is that you have less time to pay off the balance of the loan, making the monthly payments much higher than a loan with a term twice as long.
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How to know when to shorten the length of your mortgage
If you currently have a mortgage with a long term length, you might decide to refinance it in order to shorten it and pay off the mortgage sooner. Let’s dig into the circumstances where this will bring you the most benefits.
Interest savings should be higher than closing costs
The primary reason to refinance your mortgage to a shorter term is to get a lower interest rate. Depending on your finances, that’s often the case when shortening your term length.
The rate has to be low enough though that the savings will outweigh the expenses you pay to borrow money to refinance. Just as you paid closing costs with your mortgage to purchase your home, there are closing costs to refinance your mortgage as well.
These costs can include a loan application and other loan-related fees, an appraisal, and credit report fee. Depending on your specifics, costs typically add up to 2% to 6% of your loan amount.
Use our refinance calculator to learn more about what your specific costs could be.
How long do you plan to own the house?
If you divide the total loan costs of your refinance by your monthly payment savings, you can calculate the number of months it will take to reach the break-even point with the additional costs of refinancing.
If you’re planning to sell the house before reaching the break-even point, refinancing won’t provide any savings before you sell the house.
How long have you had your mortgage?
If you’ve had your mortgage for several years, moving to a shorter term could cost you more in interest up front than you would save in the long run. Mortgage payments are front-loaded with interest. With a typical 30-year mortgage, for the first 10 years, you’ll pay about half of the total interest.
If you’ve already paid on the loan long enough to more significantly bring the principal down each month, you may want to keep your current mortgage.
Can you refinance at any point after closing your original mortgage?
Most conventional mortgages can be refinanced at any point and as many times as you choose, depending on what makes sense for you financially.
If you have a mortgage that is government-backed, such as an FHA loan or a VA loan*, you may be required to wait at least six months after closing the original mortgage before refinancing.
You’ll want to look at the specific rules or your mortgage to understand if there are any barriers to refinancing and paying off your current mortgage early.
*VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency
How will your financial standing impact a refinanced mortgage?
As a lender did when you got approved for your original mortgage, they will again need to assess your financial standing to see that you have a high enough credit score and stable income to afford the costs of a refinanced loan.
They may make different considerations if your payments will increase to allow you to shorten the term of your mortgage.
You’ll also want to consider how closing costs and a new monthly payment amount will affect your current finances. Look at what works best for you financially in the long term and the short term to understand if now is a good time to refinance to pay off your mortgage sooner.
Can you get approved to shorten your mortgage?
To find out the details about whether refinancing to a shorter term will make your home more affordable, speak to a loan officer.
Reach out to discuss your goals and needs with a dedicated loan officer who can offer their recommendations about how to shorten your mortgage and other ways to make your current mortgage more affordable.