Interest rates are expected to remain low in 2020, so opportunities to refinance at a lower interest rate at little to no cost are readily available, especially if you purchased your home in 2017 or 2018.
Many of the clients I refinanced in 2019 went from one 30 Year Fixed loan to a new 30 Year Fixed loan. Even though the loan term starts over, if you look at interest paid to date along with interest expected to be paid over the life of the loan, it still makes numbers-sense to refinance. I am happy to run amortization schedules for homeowners to review these figures.
Some homeowners, however, are not interested in starting their 30-year clock over and would like to shorten it instead.
The standard fixed rate term options are 30 years, 20 years, 15 years and 10 years. Some lenders offer a 25-year term, but the interest rate is usually the same as the 30 year. The lower the term, the lower the interest rate, but of course, keep in mind that since you’re paying the loan off in a shorter timeframe, the mortgage payment will be higher.
Here’s a brief review comparing a $500,000 loan amount (conforming loan) with different fixed terms, using current interest rates. The quote assumes a refinance of a primary residence, no cash out, 40% equity in the home and credit scores of 740 or greater.
|Loan Term||Interest Rate / APR||Mortgage Payment|
|30 Year Fixed||3.50% / APR 3.623%||$2,245.22|
|20 Year Fixed||3.25% / APR 3.412%||$2,835.98|
|15 Year Fixed||3.00% / APR 3.231%||$3,452.91|
|10 Year Fixed||2.99% / APR 3.275%||$4,825.73|
The greatest benefit to choosing a shorter fixed loan term is the amount of interest savings over the life of the loan. In the same examples above, the difference you would pay in interest in the 30 Year loan versus the 15 Year loan is $186,757.92 additional. But of course, it can be much more difficult to carry the larger mortgage payment.
For conforming loan amounts (loans up to $510,400), one wonderful benefit a couple of the lenders I work with provide is a “Flex Term”. You get a 30 Year Fixed rate, but you can choose a term of 29 years, 28 years, 27 years … It gives you that forced payoff goal without having to worry about how much extra to put towards principal each month. You can reach me at email@example.com if you wish for me to review some options with you that are inline with your goals.