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Many borrowers use a refinance to shorten the term of the mortgage.
And brace yourself: Even at low rates, a shorter term means a higher monthly
payment. The benefit is that you'll build up equity faster and pay far less in
total interest over the life of the loan.
Consider Jim Neill, 48, a real estate broker and his wife Merrilyn,
55, a psychotherapist. Recently, the couple took out a 15-year fixed-rate loan
at 6.75% to replace an 8.13% ARM with a 30-year term. Their monthly payment
jumped by $200, but now they will own their own home outright by the time they
retire. In addition, the total interest on the 15-year loan will come to
$95,447, vs. $222,234 on the remaining life of the ARM -- and that assumes their
adjustable rate would have held steady at its current 8.13%. "This is
forced savings," says Jim. "When we retire, we can scale down and take
equity out of the house."
If you can't
afford the payments on a 15-year mortgage, your next best means of building
equity is to refinance for less than 30 years. To do so, ask your mortgage
company to customize your new loan's term to match the years that are left on
your old loan -- if you are five years into a 30-year mortgage, for example, ask
for a 25-year loan. |
