Although most lenders still offer mortgage rate refinance deals, few loan agents can customize loans to exactly match the term of an existing mortgage. You can easily shop rates online for fifteen-year and thirty-year fixed rate mortgages. Some lenders can even produce online mortgage quotes for terms in intervals of five years, such as a 20-year or 25-year home loan. With the right refinance strategy, you can reduce your monthly mortgage payment without extending the length of your loan.
Strategy #1: Prepay a Thirty-Year Mortgage
Mortgage lenders rarely hear requests to refinance with the remaining term (say 24 years left on a 30 year mortgage). Therefore, loan officers and customer service agents often try to shoehorn a money-saving strategy into an off-the-shelf home loan package. In some cases, mortgage lenders will offer a traditional thirty-year fixed rate mortgage with the option to make a lump sum payment up front. On paper, this strategy extends the term of the home loan. Borrowers simply "get ahead" and complete the payment cycle sooner. According to some personal finance experts, you could cheat yourself of extra savings using this technique. By financing the entire property up front and making a lump sum prepayment, you won't qualify for the best mortgage rates.
Strategy #2: Round Off Your Home Loan
More sophisticated mortgage lenders can chunk home loans into five year repayment periods. Therefore, if you have twenty-two years of payments remaining on your current mortgage, you can refinance into either a twenty-year term or a twenty-five year term. Both options offer better mortgage rates than the full refinancing from the previous strategy. However, the longer term offers lower payments with increased interest expense over the length of the loan. A shorter term may cause monthly payments to increase, sacrificing cash flow for long-term savings.
Strategy #3: Set Your Own Mortgage Amortization Schedule
The savviest home loan shoppers understand how to use financial discipline to save the most money on their mortgages. Lenders can easily accommodate traditional, thirty-year, fixed rate mortgages, especially for borrowers with significant home equity. By using a mortgage calculator, you can estimate the additional monthly payment you'll need to make to pay the new home loan off on the same schedule as your current agreement. Be sure to avoid refinance deals with prepayment penaltie to ensure this strategy will save you the most money in the long run. However, almost all loans--even those with prepayment penalties--allow you to pay down 20% or less of the principal in any given year.
No single strategy for refinancing with the same term will work for every homeowner. Understanding your personal spending and saving habits can help you determine the best kind of refinancing deal for your situation.
About the Author:
Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.
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