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November 2nd, 2012

How to save even more money when you refinance

by April Dykman


Refi ApplicationRefinancing your mortgage to a lower interest rate to reduce your monthly payment is one way to pay less for your home. In fact, a lower monthly payment is the driving force behind the majority of refinances.

“For most people who want to refinance, the monthly payment is still their number one concern, says Mark Hanley, a mortgage originator at United Lending in Austin, Texas. “It’s definitely their main focus.”

But historically low mortgage rates have prompted more and more homeowners to not only refinance to a lower interest rate, but to a lower term as well. Refinancers can maximize their savings by combining a lower rate with a shorter term, even to the tune of $100,000 or more.

Save more: shorten the term

The main drawback of refinancing to a shorter term is the chance you could increase your monthly payment. However, the interest costs you’ll save over the life of the loan could far outweigh the added monthly difference. For some borrowers, a shorter term could even keep their monthly payment about the same.

“When the payment is practically the same, or even somewhat lower, it’s a no-brainer,” says Hanley.

Over time, shortening the term of your loan saves you more money for three reasons:

No. 1: By going with the shorter loan term, you’ve essentially created “a forced savings plan.”
“The great thing [about a shorter term] is that it’s a forced savings plan” says Eric Mullis, branch manager and senior loan officer with Intercoastal Mortgage Co. in McLean, Va. “We all could pay our 30-year mortgage in 15 years, but no one does that in real life.”

No. 2: You pay off your house sooner with a shorter term.

“Some clients don’t think about the fact that if they’re eight years into their current mortgage, and they refinance into a 30-year loan, they’re basically starting over at 30 years of payments again,” says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich. “That means 38 years of mortgage payments. If they opt for a 20-year loan instead, that’s 10 less years of paying a mortgage.”

No. 3: You save significantly more money over the life of the mortgage.

The money you’ll save in interest payments by refinancing a 30-year mortgage to a 20-year mortgage could save you well over $100,000.

“One of my clients recently went from a 30-year to a 15-year mortgage,” says Mullis. Her monthly payment increased slightly, but the shorter term “basically saved her $150,000.”

Is a shorter term right for you?

Mullis tells clients that when it comes to mortgage terms, there’s no right or wrong answer. “You have to think about what’s going on in your life today,” he says.

Ready to figure out which terms are right for you? Run your numbers with HSH.com’s TriRefi calculator.

One Response to “How to save even more money when you refinance”

  1. Payday Says: November 30th, 2012 at 7:52 am

    Owning a house is a dream for every human being. Economic liberalization and competition among retail finance companies have made it easier for clients to secure a loan. However, there are eligibility criteria to be met to secure home loans and it is totally based on the amount of income that you draw as salary i.e. you cannot get any amount of home loan irrespective of your income.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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