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Why Shorter-term Loans

3 Reasons to Refinance into a Shorter-term Loan

By Richard Barrington, Refinancing Right


Although 30-year mortgages have become something of the standard home loan for Americans, there are always arguments to be made in favor of a 15-year loan. Those arguments are especially strong in early 2014.


In particular, shorter mortgage loans are worth a close look when you refinance. While you may not get the immediate savings in your monthly mortgage payments that you are looking for, your long-term interest savings should run into the tens of thousands of dollars.


Here are three reasons you should consider refinancing to a shorter-term loan:

  1. Shorter-term loans generally carry a lower interest rate. Because the risk to the mortgage lenders increases when they loan money for longer time periods, under most circumstances, 30-year loans have a higher mortgage rate than 15-year loans.
  2. Shorter loans cut years off the time you will be paying interest. Aside from the fact that you should get a lower interest rate on a shorter loan, the big difference is that you will save by paying interest for only 15 years instead of 30 years.
  3. Spreads between 30-year and 15-year mortgages are especially wide right now. The rates for 15-year loans did not rise as much as the rates for 30-year loans during 2013, meaning that the difference between the two got even bigger. The spread between 30-year and 15-year mortgage rates was 0.7 percent at the end of 2012 but rose to 0.94 percent by the end of 2013.

As you can see, shorter-term loans usually save you money in the long run, but it is that last point that makes those savings especially compelling right now.

Before you automatically opt for a 30-year mortgage for refinancing, run a comparison on a mortgage calculator between a 30-year and a 15-year loan at today's mortgage rates, and focus on the total interest that would be paid over the life of the two loans. You may well find that refinancing to a shorter mortgage is one of the greatest money-saving decisions you are ever in a position to make.




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