There is a lot of decision making involved in refinancing a mortgage loan. Before applying for a mortgage, you should figure out what your budget is, so you will know how much you can spend on fees, down payment, and the mortgage itself. Also, it is very important to come to a conclusion regarding what your future plans are, like how long you want to live in the home that you are buying. All these factors will help you better determine what kind of term you are looking for in a mortgage.
Why You Should Opt for Shorter Terms
Paying off a mortgage in 30 years is very common, and will probably work for you as well. Even if your interest rate will be slightly higher, your monthly mortgage payments will be lower, so you will have an easier time paying it off. That sounds great, but taking pretty much half your life to pay off a mortgage sounds a bit daunting. A good alternative is to get a 15, or even 10, year mortgage loan, which will have a lower interest rate but larger monthly payment. However, even though comparing a 15-year mortgage to a 10-year mortgage seems much easier than comparing a 15 and a 30-year, there are some things that you need to keep in mind before deciding on either one (Read: Home Refinancing Objectives: The Basics).
Differences between a 10-Year and a 15-Year Mortgage
Usually, paying off a mortgage loan in less years means that you will pay less in interest. The difference in interest may seem very small, less than 1 percent, for example, but that means thousands of dollars over time (even tens of thousands of dollars) depending on how large your mortgage loan is. The difference in interest between a 15-year mortgage and a 10-year mortgage will probably be even less than .50 percent, but it will still be a huge difference in the interest that you will be paying during the loan repayment period.
The downside is that, the shorter the loan term, the larger your monthly mortgage payments will be. Depending on your budget and plans, this might only be a small disadvantage. If you can afford the monthly payments and plan on paying off your mortgage as soon as possible, getting a mortgage with a lower term is the way to go.
If you are unable to make a larger mortgage payment each month, paying off your loan in 15 years instead of 10 is a good alternative. Your monthly payments will be lower, but your interest rate will be higher, so you will spend more overall than if you paid off your mortgage in 10 years. However, you have the option of making additional principal payments which will result in paying off the debt in the same amount of time as a 10-year mortgage, and also give you the option of skipping a principal payment if money is tight in any particular month.
The amount of years that you need to pay off a mortgage loan can make a large difference in how much you spend on your mortgage. Longer terms mean that you pay more overall, but you can do it much easier, shorter terms mean that you pay less overall, but at the cost of having to come up with more money each month. Ultimately, deciding between refinancing into a 10-year or a 15-year mortgage depends on how much you are willing to spend on your mortgage each month and your future plans.