Should I Shorten My Mortgage Term, Important Factors To Consider

April 27, 2021
Last updated:
October 12, 2021
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You might think that refinancing your mortgage to a shorter-term loan is a win-win, and in many ways, it is—you save on interest and can pay off your home sooner. However, it is still important to consider a few things first.

When you first bought your home a few years ago, perhaps you started off with a 30-year mortgage. Now, maybe you are considering refinancing or a 15-year mortgage. In general, one of the advantages of refinancing to a shorter mortgage is that you can sometimes find a better rate. Regardless of your main objective here, the good news is that shortening your mortgage term, locking in a better rate, and refinancing can be smart financial moves in the long run. Nevertheless, before you make this decision, there are a number of factors that you should consider—besides the possibility of paying off your mortgage sooner and saving thousands of dollars in interest rates.

Has Your Financial Situation Recently Improved?

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.

Do You Have Excess Monthly Cash Flow?

Are you already making the maximum contribution to your 401k? Do you have at least a six month emergency fund built up? Have you paid off all outstanding revolving debt or other high interest debt? Have you been contributing to your kids 529 plan and on schedule to have your child’s education covered?

If the answer to any of the above questions was NO, you should reevaluate where you apply any excess monthly cash flow. Given a mortgage’s low comparatively low interest rate and tax deductibility,it is advisable to pay down the mortgage only when you have done all the other things listed above. The last thing you want to do is pay down your mortgage but have no cash available to keep paying your mortgage if something unexpected happens like losing a job.

How Much Have You Paid Off Already?

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 if current rates are lower or historically low like they are now. 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.

Are There Any Foreseeable Financial Changes That Might Affect My Ability To Pay More?

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.

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Are There Other Ways To Pay Off My Loan Faster?

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 the 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.

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Ready to Refinance Your Mortgage?

Are you curious about refinancing or your available mortgage options? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs along with expert mortgage advice to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.

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