Save Money by Shortening the Term of a Mortgage Loan

The majority of people refinance in order to save money, which typically entails jumping to a lower rate. However, you can also save lots of money by cutting down the term of your loan even at the same low interest rate.

According to Karen Mayfield from Bank of the West, nowadays, there are lots of lenders that offer the same 30-year rate on mortgages with terms ranging from 20 to 29 years. Also, the majority of lenders offer the same 15-year rate on loans with terms between 8 to 15 years.

Although you may not instantly save money in terms of your monthly payments but you could save a lot from interest over the shorter term of your new mortgage.

However, the possible negative aspect of this shorter-term mortgage is that you might have a lesser tax deduction for your mortgage interest, but it’s still an uncertain disadvantage.

In addition, mortgage interest is not a dollar-for-dollar write-off. Instead, the deduction is dependent on your income-tax bracket. Thus, if you are in the 15 percent bracket, then you will receive only 15 cents for every dollar in mortgage interest.

Furthermore, there is the question whether or not mortgage interest will stay deductible. While it’s going to be a long time from now before the Congress would remove that benefit, it will be on the table if and when the policymakers amend the tax code of the nation.

For instance, you have a 4-year-old, 30-year mortgage with interest of 6.5 percent, and monthly payment of principal and interest for a total of $1,896. If you refinance at 4 percent into a 30-year mortgage of $288,000, your monthly payment will decrease to $1,375, which means monthly savings of as much as $521. However, you’ll be paying an extra $206,984 in terms of interest over the term of the new loan.

Mayfield advises that although not everyone agrees with shortening the term of their mortgage, you might as well consider doing so if you are wealthy enough make the same payment as you do at the moment.

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