Refinancing for a shorter term to save money with lower rates is not the only reason you should refinance your home. Considering the option for a shorter loan can save thousands of dollars in interest and free up income for use in the future. A short term loan can also help you pay down your principal faster.Most people think that by refinancing from a 30 year fixed loan to a 15 year fixed loan, their payments will double. Why wouldn't they? You are paying off the loan twice as fast, so the payments must be twice as much. What most people don't realize is that most of your monthly payments go toward interest. A much smaller portion of your payment actually goes toward reducing the balance of the loan. If you cut the loan term in half, you will still pay the same amount in interest each month. It is your monthly principle payment that goes up, and since this payment is already relatively low, it doesn't take a huge increase in the total payment to be able to pay your loan off in half the time.
The homeowner should establish their objectives for refinancing first to determine if this is an option for them. Once personal goals for refinancing are established then finding the best product will not be a problem.
Generally, the shorter the loan term the faster you build equity. For many families this can be useful as you can plan your mortgage to be paid off at the same time you plan to incur new expenses such as a college education or a retirement home.
