Cut Your Mortgage Term In Half.
You’ve probably seen ads online that offer you a trick or a secret to cut your mortgage in half. Getting the answer from those ads is a bit tricky, too!
In the real world of having a mortgage, there are real ways to cut your mortgage in half or very close. However, cutting your mortgage in half could mean different things to different people. Here’s why…
First, we’re going to look at one way to cut your mortgage term and interest in one step. Who wouldn’t want to pay less interest and for less time? Take a look!
But what if we wanted to actually cut our mortgage in half? Is that even possible or simply a false myth promulgated by deceptive Internet ads? It turns out that there are legitimate ways to cut your mortgage in half (or nearly half) and none of them involve tricks.
Select a 15 Year Mortgage Term
The easiest way to cut your mortgage in half is to literally do just that. Most borrowers select a 30 year mortgage because it offers them the lowest mortgage payment which allows them to qualify for a larger mortgage amount and buy a nicer home. Selecting a 15 year mortgage, so literally cutting the length of your mortgage in half, can save you tens of thousands or even hundreds of thousands of dollars in interest expense over the life of your mortgage. A 15 year mortgage enables borrowers to save money two ways. First, by cutting the term in half, you pay off your mortgage in half the time which means you pay a lot less interest. Second, the interest rate for a 15 year mortgage is lower than the interest rate for a 30 year mortgage. So not only do you pay interest for a shorter period of time but you pay a lower interest rate. The downside of a 15 year mortgage is that the monthly payment is higher. The example below illustrates the difference in interest rate, monthly mortgage payment and total interest expense over the life of the loan for a $300,000 30 year mortgage as compared to a 15 year mortgage.
Example: Comparing a 30 Year Mortgage to a 15 Year Mortgage
30 Year Mortgage
- Interest Rate: 3.625%
- Monthly Payment: $1,368
- Total Interest Expense Over Mortgage: $192,534
15 Year Mortgage
- Interest Rate: 2.750%
- Monthly Payment: $2,036
- Total Interest Expense Over Mortgage: $66,455
Based on today’s interest rates, a borrower would saves $126,080 in total interest expense over the term of the mortgage with a 15 year mortgage as compared to a 30 year mortgage but the monthly mortgage payment for the 15 year mortgage is $670 higher. It is important to highlight that the higher the interest rate and greater the mortgage amount, the more money you save with a shorter mortgage. As the example demonstrates, if you can afford making a higher monthly payment, selecting a 15 year mortgage enables you to cut your mortgage in half and save thousands of dollars in interest expense over the life of your mortgage.
– via freeandclear.realtytimes.com
Ways To Cut Your Mortgage Payment In Half (or close!)
If you are thinking, “cutting years off my mortgage and paying a lower interest rate sounds great but what I need is help now, every month, with a lower mortgage payment,” then you will like this excerpt from Home Buying Institute.
Take a look at these two ways to cut your mortgage payments in a big way!
Two Ways to Cut Mortgage Payments
There are basically two ways to reduce your monthly mortgage payments. You could do it by refinancing your existing loan into one with a lower interest rate and therefore lower payments — probably your best option. You could also do it by extending the term or length of your loan, which would spread the outstanding principal balance over a longer repayment window.
I don’t know if you’ll be able to cut your mortgage payments in half with either of these strategies. This will depend on several factors, such as the difference between your current rate and the one (in the case of refinancing). You’ll have to check with your lender to see how the monthly payments will work out for you. So for now, let’s just focus on the options themselves.
1. Extending the mortgage term (less common)
In some cases, a lender will be willing to extend the borrower’s mortgage term. This spreads the monthly payments out over a longer period of time, thereby reducing the size of those payments.
For instance: if you currently have 18 years left in your repayment term, and the lender extends the term back to 30 years, it could significantly reduce the size of your monthly mortgage payments. You might even come close to cutting them in half. But this strategy is somewhat rare these days. Lenders aren’t always willing to do this. So refinancing might be the better option for you.
2. Refinancing the loan (more common)
This is a much more common strategy. Depending on your current equity situation, you might be able to refinance to reduce your monthly mortgage payments. This is where you replace the current loan with a new one, ideally one with better terms.
You said your credit score is higher now, and that you’ve gained some equity in the home. Given these factors, you might qualify for a significantly lower interest rate than the one assigned to your original purchase loan. This, combined with your higher equity position, might enable you to cut your mortgage payments by 25% or more.
Refinancing is certainly an option, if you have enough equity and decent credit. Extending the term of the loan (without a full refi) is rare in the United States, but is more common in the U.K. I’m not sure where you live.
If you’re in the U.S., refinancing may be the only way for you reduce your payments. It’s a fairly straightforward process. You are basically paying off the existing loan with a new one, ideally with a lower interest rate. But can you cut your payments in half with a refi? That’s another question. You’ll have to do the math and speak to a lender to find out.
– via www.homebuyinginstitute.com
Could you afford to cut your mortgage term and pay a slightly higher note each month so you could use the money you save to improve your financial health?