Core benefits when you refinance 30-year mortgage terms
Lower your rate
Many homeowners don't know their mortgage rate. As a result, these people could be paying more than they should on interest. So, before doing anything else with your loan, make it a point to check your rate and compare it to current market rates.
Home loans with a shorter term often have a lower interest rate than 30-year mortgages. The decision to refinance 30-year mortgage terms could lead to a much lower rate and, in turn, significantly less spent on interest. A 15-year or 20-year mortgage, for example, ensures you're putting more of your hard-earned money toward the principal balance.
Own your home sooner
Let's say you're three years into paying off a 30-year loan. You've been making the same payments every month, only to realize you've paid a fraction of the principal. Maybe you're ready to start putting more funds toward your loan so you can own your home free and clear sooner.
A refinance 30-year mortgage could be the solution. Talk to your lender about which term is reasonable for your new loan. Perhaps it's ten years, 20 years, or somewhere in between.
Consider the possibilities without a monthly mortgage payment. You could invest that money and retire much earlier than you thought was possible. Other ideas include buying an investment property, paying off all other debt, or helping a family member with their homeownership dreams.
Build equity faster
It can take a while to build equity as a homeowner, especially if the market takes a downturn shortly after you close. The good news is that you don't have to settle for a 30-year loan if you can afford the higher monthly payments that come with a shorter term. Those who decide to refinance 30-year mortgage programs into a 15-year or 20-year loan end up paying down their principal much faster, helping them increase their equity in the process.
You may also want to tap into your equity with a cash-out refinance. The more equity you have in your home, the more funds you potentially have available. You can use the money for anything you want, such as improving your home or paying off high-interest debt.
Disadvantages of refinancing a 30-year mortgage
Could raise your payment
Some homeowners are reluctant to refinance 30-year mortgage terms because they're worried doing so could mean a higher monthly payment. It's a realistic concern since you'll have a shorter timeframe to pay off your new loan. Borrowers who opt for this financial move usually rework their budget to account for the higher housing costs.
Before refinancing to a shorter-term loan, think about your financial future. Any prolonged loss of income could be problematic with staying current with your payment. Saving 3-6 months of expenses can serve as a buffer to unforeseen circumstances with your money.
May not be ideal if you plan to move soon
Borrowers typically pay around 2-5% of the loan amount to close on a refinance. That can be a sizable expense, especially if you're on a tight budget or own a higher-priced home. You need to crunch the numbers and ensure a refinance 30-year mortgage won't cost you if you plan to move within a few years.
Your lender will likely suggest calculating your breakeven point, when your monthly savings equal or exceed your closing costs. For example, perhaps a refinance costs you $5,000 and saves you $100 a month. Despite the savings, you would need to stay in your home a little over four years to reach your breakeven point and make the transaction worth it.
Some lenders restart your term
There are mortgage companies that reset your term despite your current loan status. As a result, your progress paying down your principal for several years gets wiped away as you receive a new 30-year loan. While it might come with favorable terms, you're back to square one and stuck paying a mortgage for longer than you anticipated.
Options for when you refinance 30-year mortgage programs
There are several programs available for borrowers exploring a refinance 30-year mortgage. The following sections discuss the ins and outs of each loan option and what specifically makes them popular choices among borrowers. Please contact a salary-based mortgage consultant which program is best for your situation.
FHA loans are popular among borrowers largely thanks to their relaxed credit score requirements. You'll also benefit from low monthly mortgage insurance, so you can maximize your budget even after your refinance. Plus, if you already have an FHA mortgage, you may not need an appraisal when you refinance.
VA loans come with low interest rates, no mortgage insurance, and no prepayment penalties, among other pros. Perhaps most appealing to borrowers, though, is they can roll their closing costs into their new loan. VA loans are available to active-duty military, veterans, and qualified surviving spouses.
Lenders reserve jumbo loans for borrowers with higher-priced homes. Though the Federal Housing and Finance Agency (FHFA) changes loan limits regularly, this program could be a viable option depending on where you live. Consider a jumbo mortgage whether you're looking to finance a primary, secondary, or investment property.
With rising home values across the country, you may have significant equity from your home. A cash-out refinance lets you tap into that equity and use the funds for anything you want. Many homeowners put this money toward high-interest debt or home improvements.
As mentioned above, switching from a 30-year mortgage to a 15-year mortgage can help you own your home faster and save you a ton of money. But what if you want to own your home free and clear in even less time? In this case, you need to choose a lender who can customize your loan to meet your goals.
At American Financing, you can select any term ten years or over. So, if you'd rather pay off your mortgage in 12 years, you can do that. You'll find working with our salary-based mortgage consultants that a personalized loan is the only way to go.
Most borrowers won't be ready for a 15-year home loan. You can still shorten your term with a custom refinance from American Financing. Our ‘Your Term, Your Mortgage' provides a solution for those who don't want to restart the clock with a refinance 30-year mortgage.
You might consider this type of refinance for many reasons. First, while a 15-year loan could stretch your budget too thin, a 17- or 20-year mortgage could be more reasonable. Picking your term also allows you to work toward other financial goals, such as investing or funding your child's college tuition.
Our salary-based mortgage consultants will listen to your goals and create a custom loan that achieves those goals faster. For example, if you're hoping to refinance 30-year mortgage terms, they'll make it happen. Plus, there are no upfront or hidden fees to pay.
How to refinance into a 30-year loan
What if you're thinking about switching from a 15-year loan to a 30-year loan? Does it make sense to add years to your loan for any reason? Let's talk a little more about the benefits of a refinance 30-year mortgage program and when it could be a viable option in your future.
The reality is that life and circumstances change over time. Though a 15-year mortgage translates to less interest spent and homeownership sooner, it doesn't provide much wiggle room for borrowers. Even one temporary lapse in income could lead someone to get behind with their payments and, as a result, lose their home altogether.
Our salary-based mortgage consultants will tell you that a refinance 30-year mortgage offers greater stability in your entire financial situation. You can prioritize other things, along with your mortgage payment, over 30 years. Whether that involves building a savings account for emergencies or paying off debt to free up additional funds, it's a possibility when less of your monthly income goes toward your mortgage.
Here's a scenario where it's reasonable to choose a refinance 30-year mortgage. After several years of you and your spouse working and paying down a 15-year loan, one of you decides to become a stay-at-home parent once you start a family. It's a sensible decision as long as you can make it work with your budget.
Getting out of a shorter term and into a 30-year loan means a lower monthly payment and less impact on a smaller household income. Remember, though, that you could have a slightly higher interest rate and will be paying more interest. Either way, you end up with a mortgage that better fits your life.
Want to learn more about a refinance 30-year mortgage? Get a free loan review from American Financing.