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Refinancing to a Shorter Term
By CJ Moore
Sep
02
2010
The Wall Street Journal ran this story on Sunday about how many homeowners are refinancing in an effort to get a shorter term – often switching from a 30-year to a 15-year – so they can get out of debt faster.
This reminded me of a conversation I had several months ago with mortgage expert Dale Vermillion for this story on taking a common sense and long-term approach to choosing a mortgage.
Vermillion encourages homeowners to get the shortest loan possible, so they can get out of debt faster and on their way to retirement as soon as possible.
“So if you’re 25 and you want to be debt free at 45, get a 20-year term instead of a 30-year term and force yourself to pay that little bit of higher payment that will allow you to get out of debt 10 years sooner,” Vermillion said. “Because you are literally going to save hundreds of thousands of dollars in interest by doing that, and be in a debt-free position, and we all want to be debt-free.”
As Vermillion and the WSJ story both advise, make sure that switching to a shorter term is something that you can afford. If a $1,200 month payment is the maximum that you can afford and a refinance will result in a $1,600 payment, do not try to rationalize that you can afford the extra $400. That line of thinking led to the housing bust and millions of foreclosures.
A shorter term is most likely going to result in a larger monthly payment; however, it might not be as much as you think and is at least worth looking into.
If the interest rate is substantially lower on a 15-year loan than a 30-year loan, the monthly payment might not be as significant as would be expected since interest rates are currently so low.
You should also consider your debt-to-income ratio, as well as refinance fees. Vermillion advises that you crunch the numbers to see how quickly the saving in payments and term reduction offset the fees.
This trend of wanting to pay off mortgages faster is one of the few positive signs in the housing market recently and could mean we are on our way to becoming more financially-responsible borrowers. The trend, when the housing market started to take a turn toward a brick wall was: ‘Do I have enough equity to refinance and pay off all my credit card debt?’
Even if you have responsibility as your motive, do not rush into a refinance. The next and most important step is finding a loan officer who will draw up a manageable plan.
“You really do want to talk to two or three different companies so that you can compare and make sure that the individual you work with is giving you a good deal,” Vermillion said. “You don’t have to get the lowest rate. That’s not necessarily what you’re looking for. You want a competitive rate, and you want to make sure that the person you’re working with is truly looking out for you, and they’re trying to put together a loan that benefits you in every way possible.”
This reminded me of a conversation I had several months ago with mortgage expert Dale Vermillion for this story on taking a common sense and long-term approach to choosing a mortgage.
Vermillion encourages homeowners to get the shortest loan possible, so they can get out of debt faster and on their way to retirement as soon as possible.
“So if you’re 25 and you want to be debt free at 45, get a 20-year term instead of a 30-year term and force yourself to pay that little bit of higher payment that will allow you to get out of debt 10 years sooner,” Vermillion said. “Because you are literally going to save hundreds of thousands of dollars in interest by doing that, and be in a debt-free position, and we all want to be debt-free.”
As Vermillion and the WSJ story both advise, make sure that switching to a shorter term is something that you can afford. If a $1,200 month payment is the maximum that you can afford and a refinance will result in a $1,600 payment, do not try to rationalize that you can afford the extra $400. That line of thinking led to the housing bust and millions of foreclosures.
A shorter term is most likely going to result in a larger monthly payment; however, it might not be as much as you think and is at least worth looking into.
If the interest rate is substantially lower on a 15-year loan than a 30-year loan, the monthly payment might not be as significant as would be expected since interest rates are currently so low.
You should also consider your debt-to-income ratio, as well as refinance fees. Vermillion advises that you crunch the numbers to see how quickly the saving in payments and term reduction offset the fees.
This trend of wanting to pay off mortgages faster is one of the few positive signs in the housing market recently and could mean we are on our way to becoming more financially-responsible borrowers. The trend, when the housing market started to take a turn toward a brick wall was: ‘Do I have enough equity to refinance and pay off all my credit card debt?’
Even if you have responsibility as your motive, do not rush into a refinance. The next and most important step is finding a loan officer who will draw up a manageable plan.
“You really do want to talk to two or three different companies so that you can compare and make sure that the individual you work with is giving you a good deal,” Vermillion said. “You don’t have to get the lowest rate. That’s not necessarily what you’re looking for. You want a competitive rate, and you want to make sure that the person you’re working with is truly looking out for you, and they’re trying to put together a loan that benefits you in every way possible.”
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