Refinance to a 20-Year Loan? | Find Learn Save

Am I better off in a 30-year loan with smaller payments or a 20-year loan that is paid off sooner?

Is it better to refinance for a 30-year term, and lower monthly payments, or refinance for a 20-year term, with no change in monthly payments?

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  • Examine the important factors when considering a 20-year home loan refinance.
  • Understand the pros and cons of a shorter term loan.
  • Look at your entire financial picture, before refinancing your home.

While your question is a good one and a very common one, you do not include any details about your personal financial situation, making it impossible to give a specific recommendation. What I will do is analyze the factors you should examine, so you are able to make the best decision for yourself.

Here are seven factors to consider:

1) Your age

How long will you be working before you retire? Do you know what your future income would be like for either the 20-year term or the 30-year term?

2) Cash flow

Do you know what you can afford to pay right now? Have you done a budget, to examine what you are spending your money on each month and what surplus funds you have if any? Are there any other uses you could put the money to, aside from paying your mortgage more aggressively, that would be a higher priority, such as paying down any high-interest debt or saving for retirement?

3) Interest rate

What is the difference in the rates you are being offered for the 20-year term and the 30-year term? How much lower is your payment going to be on the 30-year term?

4) Prepayment penalty

Are there any penalties for paying off the either of the loans early? Are you allowed to make accelerated payments to the principal balance?

5) How long you plan to stay in your home

Most loans are not seen through until the end, either being refinanced or the house is sold.

6) Equity

Are you in a strong equity position? What type of equity position do you wish to be in if/when you sell your home?

7) Retirement

If you choose the smaller payment of the 30-year loan, would you have the discipline to put the difference in a retirement account? Are you eligible for a 401(k) match by your employer and are you maxing out that contribution?

I am trying to illustrate there are many things for you to consider. It is clear a 20-year loan lasts a shorter time than a 30-year loan. If it were always the case that taking a shorter term was better, because the interest paid is less over the course of the loan, then why should you stop at a 20-year loan? It would make sense to try and get a 15-year loan or 10-year loan (or not borrow any money at all and pay no interest!)

Try to examine your home refinance options as part of your larger financial picture. Doing so will allow you to determine your priorities, so you do not commit yourself to a decision that seems good at the time and turns out to be not the best one for you down the road.

Please see the refinance savings center to get no-cost quotes from mortgage refinance providers or to find the best home refinance loan available.

I hope this information helps you Find. Learn & Save.



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