EchoBay Expert: Mortgage refinance rates are low now but I'd rather pay off my home loan sooner and keep the same payments. Are there any downsides to doing this? Thank you.
Loyal Reader: This is a great idea. One mistake people make when refinancing is to lower their payments and keep the term the same. By keeping your payments the same and decreasing the term, you will be shaving years from your original repayment schedule and adding thousands to your bank account.
When mortgage refinance rates drop, it is a great time to examine your options. You can sometimes decrease your loan by 10-15 years and keep your payments relatively the same. That can add up to huge savings.
Let's look at this example. John has a mortgage loan of $150,000 for 30 years at 9% with a payment of $1,205. He refinances at 6% for 15 years for a payment of $1,265. For an additional $60 per month, he shaves 15 years from his repayment and saves more than $205,000 in interest!
Theoretically, that savings could buy him a more expensive house and he could pay in cash. Be sure to look at the payment schedules for different terms when you refinance and go for the shortest term you can while still maintaining an affordable payment.