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If you're one of the millions who have decided to refinance to take advantage of record-low
mortgage rates, you would be remiss if you didn't also consider refinancing to a shorter-term loan.
Refinancing your 30-year mortgage into a 15-year loan might mean a higher monthly payment, but it will allow you to save thousands on interest and pay off your mortgage much sooner. Not only does the shorter term mean fewer interest payments, 15-year loans have significantly lower interest rates than their conforming counterparts.
"Borrowers could obtain even lower rates by choosing a
15-year fixed-rate mortgage, which averaged below 2.93 percent in 2012," says Leonard Kiefer, deputy chief economist at mortgage giant Freddie Mac in McLean, Va. "This was the lowest annual average for the 15-year fixed-rate mortgage since we began keeping track of the product in 1991."
"HSH.com has tracked 15-year fixed-rate mortgages since early 1986," says Keith Gumbinger, vice president of HSH.com. "These are not only record lows, but are less than half the interest rate available as recently as 2008, and, remarkably, more than eight percentage points below those 1986 rates. It would be hard to imagine a better time to take one of these short-term loans."
Those rock-bottom mortgage rates have made shorter-term loans positively trendy.
A recent Freddie Mac report found that 27 percent of borrowers who refinanced in the fourth quarter of 2012 shortened the term of their loan, while 69 percent kept the same term and only 4 percent lengthened the term.
To understand how a shorter-term loan saves you money over the long term, compare a 30-year, $200,000 loan at 3.5 percent, to a 15-year, $200,000 loan at 2.9 percent. The monthly payment on the 30-year term was $898 and with a total interest expense of $123,312. The 15-year loan has a monthly payment of $1,371 and a total interest expense of $46,881. The monthly payment is $473 higher for the 15-year term, but the interest saved amounts to $76,431.