The majority of your mortgage payment goes toward paying interest. To save an astounding amount of money over the long term, choose a mortgage loan with a lower rate and a shorter payback term. A 15-year mortgage may be just what the financial planner ordered. This type of loan carries a larger monthly payment; but if your budget can withstand the jolt, you can save big bucks over the long haul.
Refinancing is not the only way to decrease the term of your mortgage. By paying a little extra on principal each month, you will pay off the loan sooner and reduce the term of your loan. For example, adding $50 each month to your principal payment on the 30-year loan above reduces the term by 3 years and saves you more than $27,000 in interest costs.
Weigh the costs carefully of how long you will be staying in your home vs. how much of a savings you will be getting in a refinance. Make sure you include closing costs in your decision.
Refinancing can be the right move to improve your financial situation, but be careful. Making the wrong move can put you much worse off. Smart and simple choices will go a long way toward keeping you financially secure.
Ask the lender or broker for a comparison of the up-front costs, principal, rate, and payments with and without this rate trade-off.
