When mortgage rates are low, refinancing to a shorter-term mortgage can potentially save you tens of thousands of dollars.
If rates are low enough, you'll be able to save money without having to pay a monthly mortgage payment that's too high for your budget.
Potential Interest Savings
When you pay your mortgage bill each month, much of your payment goes toward interest. In fact, during the earlier years of your mortgage, most of your monthly payment will be used to pay interest.
Interest is important and serves as the basis of the mortgage lending industry. It is how mortgage lenders make their money and cover their risk when lending money to homeowners.
However, mortgage interest can also cost homeowners during the life of their mortgage. If you have a $200,000 fixed-rate 30-year mortgage with an interest rate of four percent, you'll pay more than $143,000 in interest alone if you take a full 30 years to pay off the loan.
That is a lot of money spent on interest. If you took that same four percent loan and changed it from a 30-year to a 15-year term, you'd pay just more than $66,000 in interest over the 15-year repayment period. That is a savings of more than $77,000 in interest payments.
Of course, the challenge that comes with taking out a 15-year fixed-rate mortgage comes in the form of a higher monthly payment. Because the payback period for a 15-year loan is shorter than a 30-year loan, you'll pay more each month. For instance, with a $200,000 15-year fixed-rate mortgage loan at an interest rate of four percent, you'd pay about $1,479 a month. If you took that same $200,000 loan but with a 30-year term, you'd pay about $954 a month.
However, when mortgage interest rates are low from a historical perspective, the equation changes. Depending on the rate of your 30-year fixed-rate mortgage, you could refinance to a 15-year fixed-rate loan and enjoy the savings in interest while making a monthly payment that isn't that much higher than your current one.
Low Interest Rates
Consider the 30-year fixed-rate mortgage for $200,000 at an interest rate of four percent. Again, the monthly payment for that loan comes to about $954. If you took that same amount and refinanced it to a 15-year loan with a rate of 3.19 percent, your payment would be about $1,399 a month.
That is just $445 more a month, or $5,340 more a year, than you'd have paid with your 30-year fixed-rate loan. That might seem like a lot, but consider the interest savings. The 15-year fixed-rate loan at an interest rate of 3.19 percent would require you to pay a total of about $52,000 in interest if you took a full 15 years to pay back the loan. That is considerably less than the $144,000 in interest payments you'd make with the 30-year fixed-rate loan at 4 percent interest.
If you want to reduce the amount of interest you'll pay during the life of your mortgage, maybe it is time to investigate the benefits that come from refinancing to a shorter-term home loan. Even though you will have to make a larger monthly mortgage payment, go back and review your household budget to determine if that mortgage payment will fit and make sense. If it does, you'll stand to potentially save thousands of dollars in mortgage interest.
Think refinancing will work for you? Talk to a BancorpSouth mortgage lender today for details.
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