Shortening your mortgage term can save interest and help you pay off your home sooner, but that does not automatically mean refinancing into a shorter loan is the best move. In most cases, the real decision comes down to three paths: refinance into a shorter term, keep your current mortgage and make extra principal payments, or wait if your budget needs more flexibility.
If you started with a 30-year mortgage a few years ago, you may now be considering a refinance into a 15-year mortgage or another shorter term. That can be a smart move in the right situation, especially if the numbers work and the higher required payment fits your budget. But before you commit, it is important to compare that option with simply paying extra on your current loan and to think carefully about your cash flow, refinance costs, and how stable your finances are likely to be over time.
One of the first things you should consider is if your financial situation has improved. For instance, if you have recently been promoted to a higher paying position, paid off other financial obligations, or experienced a substantial windfall of sorts, then shortening your mortgage term could definitely be a smart move. On the other hand, if your situation has improved for the short term, then you might need to go back to the drawing board. Here a prime example is if you receive a bonus at work. In this instance, making a larger monthly mortgage payment or utilizing one of the three ways to pay off your mortgage sooner might be the better route.
This question matters because a shorter mortgage term usually works best when you can handle a higher required payment month after month, not just during a strong season financially.
Before you commit to paying more every month, look at your budget through a flexibility lens. Do you have enough emergency savings to absorb an unexpected expense or income interruption? Are you also managing any high-interest debt or other near-term obligations that could compete with a larger mortgage payment? And would a higher required payment limit your ability to handle other goals that matter to your household?
If your budget feels consistently strong, a shorter-term refinance may be reasonable. If your cash flow is positive but less predictable, keeping your current mortgage and making extra principal payments may give you a safer way to pay the loan down faster without locking yourself into a larger mandatory payment. The key is not whether you can pay more in an ideal month, but whether a higher payment is appropriate for your overall financial situation.
If your financial situation has improved for the foreseeable future, then the next big question to tackle is how much have you paid off already? Overall, depending on how far along you are on repaying your mortgage, moving to a shorter-term loan may very well increase your monthly payments, but it can also shrink them along with your interest costs. The latter is especially true when refinance rates are favorable relative to your existing mortgage. That said, to get a better sense of where you stand payment-wise, speaking with a trusted mortgage professional and crunching the numbers can make a world of difference.
Before you opt to shorten your mortgage, it is also important to ask yourself if you can actually afford a higher payment right now as well as in the future. For some homeowners, finding an extra few hundred dollars in the monthly budget moving forward is more than doable. But for others, things may come up, like their children going to college soon or maybe even a move in the next couple of years. And there is also the actual cost of refinancing. Again, this all boils down to proper financial planning. So, if you have a college fund already set up, are just starting a family, or plan to stay in your home for years to come, then these common financial changes down the road may be a non-issue.
However, if you are planning a move in the next couple of years, then refinancing or a shorter mortgage term might not equal enormous savings. So, you should make it a point to consider not only the costs of refinancing or shortening your mortgage but also where you see yourself and your finances in the next 5 to 10 years.
If you are trying to decide between refinancing, prepaying, or leaving your loan alone for now, this simple framework can help:
Refinance to a shorter term may fit best if you want a fixed payoff schedule, expect to stay in the home long enough to justify the upfront costs, and are comfortable with a higher required monthly payment.
Paying extra principal on your current mortgage may fit best if you want to pay the loan off faster but still keep the flexibility to drop back to your normal payment in months when cash flow is tighter. This path can also make sense if you want to avoid refinance closing costs.
Keeping your current setup for now may be the better choice if your budget is uncertain, you may move in the near future, or you are not yet ready to trade payment flexibility for a stricter payoff plan.
In other words, the best option often depends less on whether a shorter term saves interest and more on how much payment certainty, flexibility, and time in the home you expect to have.
Ultimately, if you are still on the fence about shortening your mortgage term, that’s okay. There is more than one way to pay down your mortgage quickly. What’s more, with these strategies, you may very well be able to pay off your loan faster without changing your interest rate or incurring additional closing costs.
For instance, you can simply increase your current mortgage payment. Here, you would take your current payment and divide it by 12, then add that amount to your payment each month. If you do opt for this alternate option, make sure that you check with your lender, as well as go over your monthly statements to ensure the extra amount goes toward principal. If all goes according to plan and you make consistent payments, you could very well knock years off of a 30-year mortgage.
Yet another way to add an extra monthly payment is to opt for a bi-weekly mortgage payment schedule. In this instance, paying every two weeks gives you the equivalent of a thirteenth payment. Furthermore, the majority of lenders typically make bi-weekly payment schedules fairly painless. That said, be wary of setup fees or using a third-party servicer, which can ultimately diminish your savings.
Last but not least, you can also decide to simply crunch the numbers and figure out what your payments would be on a shorter-term loan and just make those exact payments each month without going through the refinancing motions. Plus, if you are short on cash for some months, you can simply revert to your normal payment amount without the risk of penalties.
Overall, these are just a few important factors to consider when it comes to shortening your mortgage term and at least three ways to pay off your mortgage sooner.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
It can be worth it if the higher required payment fits your budget, you expect to stay in the home long enough to justify refinance costs, and the numbers show meaningful interest savings. It may be less attractive if you need more monthly flexibility or may move in the near future.
A shorter-term refinance may be better if you want a fixed payoff schedule and are comfortable committing to a higher required payment. Making extra principal payments may be better if you want to pay the loan off faster while keeping the option to fall back to your normal payment when cash flow is tighter.
Compare the upfront refinance costs with the potential long-term interest savings and consider how long you expect to keep the loan. If you may move in the next few years, the savings may not be large enough to outweigh the cost of refinancing.
No. A shorter term can reduce total interest paid over time, but that does not guarantee a lower interest rate. Whether the new loan improves your payment or interest costs depends on current refinance rates relative to your existing mortgage and on your overall loan terms.
Keeping your current mortgage and making extra principal payments may be the better fit. That approach can help you reduce your balance faster without locking yourself into a higher mandatory monthly payment.
Often not. If you are planning a move in the near future, refinancing into a shorter term may not produce enough savings to offset the closing costs and reduced payment flexibility.
Yes. You may be able to add extra principal to your regular payment or switch to a biweekly payment schedule, depending on your lender. It is important to confirm that any extra amount is applied to principal and to watch for setup fees or third-party servicing charges.
Paying extra principal each month can help you reduce the loan balance faster and cut total interest over time. The exact impact depends on your loan balance, interest rate, and how early in the loan you begin making extra payments.
Extra principal payments can reduce the amount of interest you pay over the life of the loan because you lower the balance faster. However, that does not automatically change your mortgage rate or your required monthly payment on the existing loan.
A shorter loan term usually helps you pay off the home sooner and reduce total interest, but it comes with a higher required monthly payment. A longer term usually offers more cash-flow flexibility, which can be valuable if your income or expenses are less predictable.
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