December 10th, 2019 8:27 AM by Jackie A. Graves, President
from a 30-year, fixed-rate mortgage into a 15-year fixed loan can help you pay
down your mortgage faster and save a ton of money on interest, especially if
rates have fallen since you bought your home.
mortgages tend to have lower interest rates, and this means more of your
payments will go toward the principal balance of the loan.
mortgage can be a good move for many homeowners, but it has some drawbacks. For
starters, your monthly payment will likely increase because you’re compressing
the repayment schedule into a shorter time frame. That means you’ll have less
cushion in your monthly budget, especially if you’re on a fixed income.
candidates who have sufficient cash flow, this move can be advantageous,
despite the higher monthly payment. Good candidates include homeowners who have
been in their homes for several years and have a monthly budget and income that
permit the higher payment, without cutting things too close.
refinance into a 15-year mortgage, shop around and compare current refinance mortgage rates from different
monthly payment on a mortgage is the amount required to be paid in full each
month. As the minimum payment for a 30-year mortgage will be lower than that of
a 15-year mortgage, this allows more flexibility within your monthly budget.
That can come in handy if your income changes, you lose a job or you have
financial emergencies to cover.
considering converting to a 15-year mortgage, homeowners should carefully
consider the impact on their finances. You should evaluate the impact on your
ability to pay monthly expenses, and how the higher payment will affect your
capacity to pay down debts and invest–compared your current scenario with a
goal just to pay down your mortgage faster, you can do that with a 30-year loan
by simply making periodic extra payments. If you make enough extra payments
over your loan term, you can easily shave off time from your loan, even 15
years if you desire.
with this strategy is that you’ll still pay a somewhat higher interest rate on
the 30-year mortgage compared with a 15-year loan. You also need to earmark
extra mortgage payments to go specifically toward paying down your loan
at an example of how a lower interest rate and shorter loan term impacts the
principal amount of a mortgage. In the example below, a homeowner with a
30-year $200,000 mortgage can pay it off in 15 years by adding $524 to each
30-year mortgage, you can skip the extra $524 payment any month you want
if you lose your job or have an emergency expense to cover. A 15-year mortgage
with a higher minimum payment, however, doesn’t give you that flexibility.
Adding payments to cut loan term in half
Monthly principal and interest
Total interest, life of the loan
30-year loan for $200,000, paid off in 30 years
30-year loan for $200,000, paid off in 15 years
15-year loan for $200,000, paid off in 15 years
calculate the effect of making extra payments (each month, annually or one
time), use Bankrate’s mortgage
amortization calculator. Input the loan amount, term and interest rate, then click the
“show amortization schedule” button, which reveals a section that lets you
calculate the effect of extra payments.
your money tied up in your home can be risky. Many financial experts recommend
having at least three to six months of emergency savings set aside in case you
lose your job or cannot work for extended periods.
refinancing a mortgage, you could contribute more money toward a 401(k) plan or
an IRA account, or beef up your emergency savings fund. The latter approach
helps you avoid revolving credit card balances from month to month and
incurring more debt at a higher interest rate.
debt is low-cost debt, and pouring more money into an illiquid asset – your
home – may do more to limit your financial flexibility than enhance it,” says
Greg McBride, CFA, Bankrate’s chief financial analyst. “Money in the bank will
pay the bills; home equity will not.”
paying off high-interest debt, saving for a rainy day and boosting retirement
savings should be top priorities. Paying off your mortgage early means you may
have less money to stash away for the future.
saddle yourself to the higher payments of a shorter-term mortgage, make sure
you’re maximizing your tax-advantaged retirement savings options, your Health
Savings Account and your 529 college savings accounts,” McBride says. “Paying
down a low-rate, potentially tax-deductible debt, is a comparatively low
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