About 31 percent of all those who refinanced in the first quarter of this year cut their mortgage terms from 30 years to 15 or 20, according to Freddie Mac, reports the New York Times. This marks the second highest level since 2002′s peak of 35 percent.
Low interest rates and an average of three-quarters of a percentage point difference between 15- and 30-year mortgages have motivated homeowners to refinance. Although shorter term mortgages can sometimes mean higher monthly payments, they enable borrowers to build equity at a faster rate.
USA Today suggests that not all borrowers should move to refinancing at shorter loan terms. Considering other financial goals is key:
- Pay off other debts, especially credit cards, that carry higher interest rates.
- Fully fund retirement accounts.
- Forecast the future by ensuring adequate monthly income to maintain a desired lifestyle.
- Calculate the costs of refinancing, which are typically 3% to 6% of the loan principal. Some borrowers choose to pay the fees upfront, while others fold them into the loan amount.
Those who benefit from choosing a 30-year term can still reduce their principal by making one extra mortgage payment each year (a 30-year loan is thereby reduced to a 23-year loan) or by paying down the principal upon refinancing to a lower interest rate. Mortgage professionals can help borrowers determine what makes best sense for them.