Question: Should i refinance for 25 years or for the remaining term of my original loan?

(Posted by: AmandaB on 2010-07-21 08:42:48)

We are considering refinancing our mortgage for an interest rate that is 2 % lower than our current one. The mortgage company will allow us to refinance for either 300 months (25- years), or for the remaining term of our original 30- year loan (324 months). Refinancing for 25- years will shave 2 years off the back of our mortgage and save us a little each month. Refinancing for the remaining term will save us more each month, which would be really nice. Which option do you think is best? The mortgage is a fixed rate. We do not have a car note, but we do have a good amount of student loan debt.

Posted by: Judy on 2010-07-21, 08:50:04

I have moved many times - many mortgages. This is what I do. I take the 30 year loan - every time. The trick is: To make payments on your own towards the principal. Why: You never know when you are going to fall on hard times. The lower payment may be your salvation. In good times - make extra payments towards principal by writing an extra check with the words "payment towards principal " Also, don't do this unless you have all your credit card debt paid in full each month. And I would rather see you pay off any car loans first. Also make sure that you have at least 6 months worth of living expenses in a savings before making extra payments towards anything. You can have a goal to pay off that home in 20 years. You don't have to study it to death - just start paying off debt and before you know it you will be living debt free. Do not dare let the bank trick you into adjustable rate ARMS, options, interest only, etc. Do fixed rate only. And before you sign ask if there are any pre-payment penalties. Pre-payment penalties come with the arms - but just make sure. Some banks are still trying to scam people to death. /

Posted by: Arbor Mortgage on 2010-07-21, 09:54:07

This is really a personal decision. Either option is good, and will save you money both monthly and over the long haul. If you really need the extra money to pay the current debt, then go with the longer term, pay off the debt, then start adding extra principal payments after the debt is paid off. You'll likely pay it off even faster than 25 years that way.

Posted by: Bob on 2010-07-21, 14:58:45

If there is no difference in the rates offered, take the 324 month term but pay the amount that will retire the loan in 300 months if you want. There are only a few lenders that offer a lower rate for 25 years as opposed to 30. You can always pay more than you have to, but lenders really frown on you paying less than the required payment. This way you can get the benefit of the lower rate, but the flexibility of knowing you could pay a little less if you ever come up short or have an opportunity to get a better return on your money somewhere else. If you are getting a typical rate of about 4.5% there probably will come a time in the next 25 years when you can earn more than that in a bank account or other investment.