Many homeowners could benefit from refinancing their mortgage to a lower interest rate, but they don’t want to deal with the hassle of starting over with a new 30 year loan. They’ve already made so many monthly payments at their current rate and they don’t see the advantage of lowering it.
However, you can save money by refinancing from a 30 year mortgage to a 20 year mortgage. First of all, it’s important to remember that shorter terms generally have a lower rate. So a 20 year mortgage will typically have a rate that’s lower than a 30 year. Because the term is shorter than a 30 year, the borrower pays less interest over the life of the loan. This translates into long-term savings.
On the other hand, the monthly payment will be higher for a 20 year mortgage as opposed to a 30 year mortgage. So you need to decide if you are more concerned with short-term savings or long-term savings.
|Term||Loan Amount||Rate||APR||Payment||Total amount paid over the life of the loan|
|30 yr fixed||$300,000||3.500%||3.820%||$1,347||$484,968|
|20 yr fixed||$300,000||3.375%||3.820%||$1,739||$417,360|
|15 yr fixed||$300,000||3.000%||3.570%||$2,144||$386,036|
This example is to illustrate the importance of the term in determining the right loan for you and your family. As you can see, the 30 year loan is the cheapest per month, but will cost you the most over the life of the loan.
- Monthly Payment
- Total Payment
Take a look at our mortgage calculator and run a couple of examples with your own loan amount. To see your long-term savings, multiply your monthly payment by 240 if calculating a 20 year or 360 if calculating a 30 year or 180 if calculating a 15 year.