Should You Refinance to a Shorter-Term Mortgage?
Homeowners who refinance to a shorter-term mortgage can save on interest costs and reach the goal of owning their home outright sooner. But if you plan to refinance into a shorter loan term, be prepared for a larger monthly payment and its effect on your household budget.
On the flip side, if you refinance into a longer loan term or avoid refinancing altogether, you’ll have smaller monthly payments but you’ll pay more in interest over your loan’s lifetime.
When should I refinance to a shorter term?
Refinancing a mortgage means taking out a new loan to replace your old loan by paying it in full. The purpose of refinancing a home is to get into a loan that better suits your needs, so it’s crucial to understand which refinance loan terms correlate with the results you want.
| If you refinance to … | Then you’ll get … | |
|---|---|---|
Benefits | Drawbacks |
|
| Shorten your loan term |
|
|
| Lengthen your loan term |
|
|
| Reduce your interest rate |
|
|
| Convert from an adjustable-rate to a fixed-rate mortgage |
|
|
| Tap your home’s equity |
|
|
There’s no rule about how many times you can refinance, but keep in mind that you must pay closing costs each time you do.
When does it make sense to refinance to a shorter-term mortgage?
If your goal is to pay the least amount of interest possible, or to pay off your mortgage much sooner, you may find refinancing to a shorter-term mortgage beneficial. Your monthly mortgage payment will be higher, but you’ll save money over time. In most cases, shorter-term mortgages come with lower rates than 30-year mortgages.
Shorter-term mortgage refinance example
As an example, let’s say you refinance to a 15-year mortgage. Your existing loan has a 30-year repayment term and 6.09% interest rate, and you’ve been paying it down for five years.
Refinancing to that 15-year loan makes your monthly payment jump up by about $621, but the tradeoff is that the total interest costs paid on your loan will be more than $143,663 lower than if you’d stayed with the 30-year mortgage.
| Existing 30-year loan | Refinanced 15-year loan | |
|---|---|---|
| Loan amount | $329,840 | $310,690 |
| Interest rate | 6.09% | 5.98% |
| Monthly payment | $1,997 | $2,618 |
| Total interest costs for each loan if you borrowed them individually | $388,966 | $160,626 |
| Total interest actually paid toward each loan | $84,677 | $160,626 |
| Total interest actually paid for the home | $245,303 | |
Pros and cons of refinancing to a shorter-term loan
| Pros | Cons |
|---|---|
You’ll pay less interest over the life of your loan You’ll have a lower interest rate compared to a longer-term loan You’ll build home equity faster | You’re locked into a higher mortgage payment You’ll have less wiggle room in your monthly budget You may have a harder time qualifying, depending on your income |
When does it make sense to refinance to a longer-term mortgage?
Switching to a longer-term mortgage may make more sense if shrinking your monthly payment is your primary goal. You’re trading the higher monthly payment of a short-term mortgage for a more expensive loan, though.
Pros and cons of refinancing to a longer-term loan
| Pros | Cons |
|---|---|
You’ll have a lower monthly payment You may get a lower interest rate compared to your current rate You might have room in your budget for extra principal payments | You’ll have a higher interest rate You’ll pay more in interest over the life of your loan You’ll build home equity at a slower pace |
Should I refinance or pay extra?
Deciding whether to refinance to a shorter-term mortgage ultimately depends on the refinance interest rate you can get and what’s most comfortable for your situation. Before you move forward, factor in the following considerations:
→ Do you plan to move anytime soon?
Before you shell out 2% to 6% of your new loan amount in the form of refinance closing costs and fees, first calculate your break-even point, or the number of months it’ll take you to recoup your refi costs. If you’re planning to move before — or even shortly after — you break even, a refinance likely isn’t a good idea.
LendingTree’s refinance calculator can help you estimate your break-even point, as well as your lifetime interest savings.
→ Can your budget handle a higher mortgage payment?
Shorter loan terms may come with a lower interest rate, but that won’t do you any good if you can’t afford the mortgage payment. An unexpected illness, job loss or other financial setback could make your payments unaffordable and put you at risk of mortgage default.
You can’t predict the future, of course, but it’s wise to have a backup plan for these scenarios, such as a larger emergency fund.
→ Are you prepared for the tax implications of a short-term mortgage?
Homeownership comes with many benefits, including tax incentives. These include the mortgage interest deduction, which allows you to deduct loan interest payments from your taxable income each year.
Since you’ll pay significantly less interest with a shorter loan term, you can’t deduct as much interest as a borrower with a longer repayment term. Consult a tax professional for more guidance.
Alternatives to refinancing to a short-term mortgage
- Make biweekly payments. Divide your monthly payment amount by two and make biweekly mortgage payments. Over the course of a year, you’ll have made 26 half payments, or 13 full payments. Sticking to this schedule can shorten your loan term by a few years.
- Request a mortgage recast. If you have a lump sum set aside that you’d like to put toward your mortgage balance, ask your lender about recasting your mortgage. You’d shrink your outstanding balance and end up paying less each month, since your lender recalculates your mortgage payments based on a smaller principal amount.
- Earn extra income to pay down your loan balance. If you pick up a part-time gig, or take on a renter or side hustle, your earnings can help you chip away at your loan’s principal balance more quickly.