Has your financial situation improved greatly since you first took on your mortgage? That's great! You have some options, including paying off your current mortgage ahead of time or refinancing to a shorter term. When it comes to the former option, it's important to make sure there isn't a prepayment penalty and that your credit is in good shape. When it comes to the latter option, we've some more information for you. Check out the factors below to help you figure out if this is a good decision and how you might go about refinancing to a shorter-term mortgage.
The benefits of a shorter mortgage
Shortening your loan's term means that you will pay less interest over the length of the loan. This means you will spend less on your home overall. You will also likely secure lower rates, but your monthly payments may be higher. It's important to make sure this is sustainable for your financial situation before making a change. Your credit score will have a major impact on the rate you'll be approved for, so know where you stand before you apply. You can check two of your credit scores for free on Credit.com.
If you can afford the higher payments, you will reduce your debt faster, pay less in interest and eventually be done with it altogether. Then you will be able to direct that monthly payment you had been setting aside to other financial goals. Your potential savings and home equity can allow you to make other investments or purchases, all while feeling more financially secure as you enter the next phase of life.
The precautions you need to take
You want to be sure paying off your mortgage early doesn't pose a significant risk to your finances. The money you use should not threaten your emergency fund or other financial priorities. For example, if you can only afford to make the larger monthly payments by dipping into your savings or not contributing to your retirement fund, it likely isn't a good idea. Since you will pay off your mortgage sooner, this will likely affect your tax situation.
Should you make the jump?
The first step is making sure changing the term of your loan makes financial sense. Calculate what you will save in interest costs over the life of the loan and compare that to what you will pay in refinance closing costs. If you will save more money than you spend, it could be a good idea.
The next step is contacting your current lender and asking them about your refinance options. Then it's a good idea to shop around with other lenders to see if you can find better rates or terms.
This is not a decision that should be taken lightly, so evaluate the potential effects refinancing your mortgage could have on your finances before you make your choice. It may feel great to own your home outright and be mortgage-free, but not if it comes at the cost of other financial goals.
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