How You Can Reduce Your 30-Year Mortgage to a 15-Year Mortgage
The main reason why most borrowers decide to refinance their mortgages is to obtain a better interest rate, which can lower their monthly payments. However, some borrowers choose to refinance their mortgages in order to reduce their mortgage terms and free up cash for other opportunities. However, a shorter mortgage term could come along with a lower monthly payment as well.
A very important aspect that many borrowers tend to overlook is the fact that getting a mortgage that’s subject to certain terms and conditions is a matter of choice. What’s more, you can choose a different type of home loan even while repaying your current mortgage. Although a mortgage represents a financial obligation that you’re responsible for, you’re not obligated to keep it the full term. This simply means that you can choose to pay it off early or refinance it into another mortgage with new terms and conditions that better fit your financial goals.
Paying Off Your 30-Year Mortgage Early
Paying extra money toward your mortgage balance can reduce the total term of the mortgage along with the interest amount you would otherwise need to pay over the life of the loan. However, an important thing to remember is that a 30-year, fixed-rate mortgage requires borrowers to make fixed monthly payments. As a result, paying more each month won’t lower your monthly payment.
The good news is that many mortgages issued after January 10, 2014, don’t come with a prepayment penalty. Even though federal law allows lenders to charge early payoff penalties in some cases, there are specific financial and time restrictions that lenders must comply with. For instance, prepayment penalties can be charged during the first 3 to 5 years of a mortgage. To find out if your mortgage includes a prepayment penalty clause, you need to check your mortgage agreement. If there isn’t a prepayment penalty stipulated in your contract, you can make additional payments toward the principal without worrying about having to cover penalty fees.
Now the question is: How much should you pay extra in order to shorten your 30-year mortgage term by 15 years? Well, the answer depends on a series of factors, including the initial loan amount, outstanding mortgage balance, interest rate, and the number of years left on your mortgage. As an example, if you’ve just taken out a 30-year $350,000 mortgage at a 4% fixed interest rate, you’d need to pay $917 in addition to $1,770 per month in order to cut the mortgage term in half.
Reducing the term of your mortgage isn’t the only benefit of making additional payments toward the principal. Paying off your mortgage early will also reduce the total interest, which can result in significant savings. Using the example presented above, you can save roughly $135,000 over the life of the loan.
The benefits of paying off a mortgage early cannot be denied. However, not everyone can afford to make an extra payment in addition to the monthly mortgage payment. In that case, refinancing is another great strategy to reduce a 30-year mortgage to a 15-year mortgage.
How to Refinance a 30-Year Mortgage into a 15-Year Mortgage
When refinancing, a shorter repayment term may translate into a higher monthly payment. That’s because refinancing to a shorter-term mortgage basically means paying back the same loan amount over a shorter period of time. However, shorter-term mortgages typically carry lower interest rates. Considering the same $350,000 mortgage on a 30-year term at a 4% interest rate, your monthly mortgage payment would be about $1,770. Using the same loan amount, but with a 20-year term at a 3.5% interest rate, your monthly payment would be $2,130. Although you’d end up paying $360 more per month, you would be debt-free and have full ownership of your home 10 years sooner.
If a mortgage refinance doesn’t work for you, you may be able to adjust your mortgage term and save money on interest by making additional principal payments whenever you can. For instance, making an extra payment of $1,000 a year toward your mortgage principal will allow you to shorten your mortgage term by 2 years and 7 months and save nearly $25,000 in interest. Whether you make an extra payment every month or once a year, it’s important to make sure the payments go toward the principal balance.
As you’re able to see, reducing a 30-year mortgage to a 15-year mortgage requires a thorough analysis. Although paying a mortgage early will put more money in the home equity, the right choice depends on your current mortgage and long-term financial goals. If you don’t know whether your decision to make extra payments is financially feasible, our professionals can help you find out if switching to a 15-year mortgage could work as part of your overall financial strategy.
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