Why would you reduce your mortgage term, and how much can you save?

During the term of a mortgage, 30-year mortgage might not seem like such a good idea anymore. A more careful deliberation of current economic and personal income realities can make a longer term mortgage less feasible than a shorter term one. In such cases, reducing your mortgage term would be a more preferable option.

There are a few reasons why you would want to reduce your mortgage term and each one offers distinct advantages.

 Cheaper interest rates

The major advantage of shorter term mortgages is that the interest rates charged on shorter term mortgages are lower than longer terms mortgages. Although refinance rates are typically higher than initial purchase rates, mortgage rates on Wells Fargo revealed than 15-year refinance rates at 3.635% are lower than 30-year initial purchase rates of 4.375%. The initial purchase rates of 15-year mortgages are even lower, at 3.5%. An examination of current average mortgage refinance rates revealed even lower refinance rates for 10-year refinance mortgages, standing as low as 3.12% compared to 3.16% for 15-year refinancing and 4.05% for 30-year refinance mortgage rates.

Build equity faster

Mortgage payment structures are done in a way that the borrower pays a larger portion of interest charges earlier during the loan period, with principal repayment slowly increased during the life of the mortgage. This delays building equity in your home in a typical thirty year mortgage. Shorter term mortgages builds equity faster with  a borrower having up to 20% equity after five years in a 15-year loan compared to just 7% equity at the same point in a 30-year mortgage.

Quicker repayment saves money

Even when the interest rates charged are the same, a shorter mortgage means your total mortgage payment is less than a longer term one. Although increasing the amount you pay monthly, the total amount you would save is significant enough to justify the added stress of an increased monthly payment amount. Using a mortgage payoff calculator, we discovered that you can save as much as $74,380 on the amount you would have ordinarily paid if you increased your $1,230 monthly payment by $492 five years into a 30-year mortgage on a 4.3% mortgage with your total payment amounting to $583,000 instead of $657,000, shortening your mortgage term by 7 years, 9 months.

Faster freedom from debt

One very important advantage to shortening your mortgage term is that your home becomes fully yours, free from debt much faster, and frees up your finances for other pursuits. The single biggest monthly expense of most people is their mortgage payments. Having a shorter mortgage term means you would get full ownership of your home and the significant monthly mortgage payments can be channelled to other investments.

Although it might be necessary to contact a mortgage professional for detailed information about mortgage agreements, the decision regarding whether a shorter mortgage term is preferable largely depends on your personal financial situation. If your personal finance plan involves saving as much as you can on your total mortgage payments and your income stream can support higher monthly payments, shortening your mortgage term saves you more money than if you continued on a longer term mortgage.