Building Equity More Quickly

Aside from receiving a favorable rate, many people choose to refinance to shorten their mortgage dramatically. If you are considering this strategy, you should be warned that even with a lower rate on your refinance your monthly payment will be higher. However, you will benefit through owning your home faster and paying far less in total interest over the life of your mortgage.

Consider a hypothetical example. If you have a 30-year adjustable rate mortgage at an 8.13 percent rate, you could replace this loan through refinancing with a 15-year mortgage at a 6.75 percent fixed rate. Your monthly payments would increase by $200, but you would be able to own your home, free of encumbrances, in almost half the time it would have taken under your old mortgage. Also, the total interest savings would be phenomenal ý you will pay a total of $95,477 on the new loan as opposed to $222,234 you would have owed on the old mortgage. Because the other mortgage had an adjustable rate, the savings may be even greater. The calculations on total savings above assume the rate on your old loan would have stayed constant at 8.13 percent. This type of savings can come in very handy after retirement, and you won't have to worry about mortgage payments either.

Unfortunately, you may not be able to afford raised payments on a 15-year mortgage like the one described above. However, you may still be able to increase your equity by working with your mortgage company to refinance for less than 30 years. You might try getting a loan to match the amount of years left on your old loan. For example, if you have had a 30-year loan for five years, you might want to take out a 25-year loan when you refinance. This way you Don't add years to your mortgage and are still able to take advantage of lower interest rates.