Re-Financing with Shorter Loan Terms

For some homeowners there is the option to making a sound re-financing decision even when interest rates
are stagnant, the homeowner does not have a great amount of equity in the home and the homeowner’s credit
score has not increased significantly. You might wonder how this is possible. It certainly isn’t an option for
every homeowner but those who can afford to pay significantly more each month can yield huge financial
benefits by refinancing their loan terms from 30 years to 15 years. The benefits which may result from this type
of re-financing include a significant overall savings, the ability to gain equity quicker and the ability to repay the
balance of the loan quicker.

Higher Monthly Payments Increase Overall Savings

Re-financing with shorter loan terms is definitely not an easy option but homeowners who have a large monthly
cash flow or who receive a sizable promotion at work might be able to consider the possibility of re-financing
by decreasing the loan terms from 30 years to 15 years.

The effect of this type of re-financing will be a significantly higher monthly payment which is not conventional
but can be worthwhile if it meets the needs of the homeowner. In particular this type of re-financing option is a
viable solution if the homeowner can afford the increase in monthly payments and has an overall goal of
reducing the amount of interest they will pay over the course of the entire loan.

Reducing the amount of interest is critical to the overall savings plan because the homeowner does not have
the option of reducing their original debt but they can drastically reduce the amount of interest paid over the
course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid over a period of 15
years while the other loan is to be repaid over a period of 30 years. It is clear that in this example, the
homeowner with the 30 year mortgage will pay more during the course of the loan.

Equity Gained Quicker

Another major plus to re-financing by reducing the loan terms from 30 years to 15 years is the aptitude to gain
equity in the home at a significantly faster rate. The amount of the equity in the home is equal to the amount of
the principal loan which has already been repaid by the homeowner. Under a conventional loan, the
homeowner typically pays a combination of principal and interest with their monthly payments. The amount of
the principal which is repaid on two mortgages for the same amount and with the same interest rate will be
different if one loan is a 30 year term and the other is a 15 year term. The homeowner with the 15 year
mortgage will be paying more of the principal each month and will therefore be accumulating more equity each
month. Gaining equity in the home quicker is ideal because it gives the homeowner greater flexibility. The
equity in the home can be used for a number of purposes including home improvement projects, travel,
educational pursuits and small business ventures.

ABOUT THE AUTHOR

Bob Schwartz, is a Certified Residential Specialist, CA licensed real estate broker with www.Brokerforyou.com. Bob has over 27 years of residential real estate experience, authored a number of published articles and served as an expert witness for San Diego lawyers. You can contact Bob via e-mail at bob@brokerforyou.com or visit his highly popular San Diego real estate website at: http://www.brokerforyou.com
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