Is Refinancing a 30-Year Mortgage to 29.5 Years Worth the Effort?
When considering the refinancing of a mortgage loan, homeowners often ponder whether the slight reduction in interest rate will translate to significant savings in the long run. For a 30-year mortgage term, reducing the term by .5 years to 29.5 years can be an attractive option, but let's explore the details to see if it truly makes sense.
Minimal Savings from a .25 Interest Rate Reduction
The savings from a .25 reduction in interest rates on a 30-year mortgage might be minimal at best. Homeowners should recognize the cost of refinancing and the potential years it might take to offset these costs. A detailed examination of the numbers reveals that it may not be worth the effort for many homeowners.
The Cost of Refinancing
Refinancing costs, commonly known as closing costs, can significantly impact the feasibility of reducing the mortgage term. These costs include application fees, appraisal fees, title search fees, and more. Even if these costs don't come out of pocket, they are often rolled into the new loan amount, raising the overall loan balance.
For example, a .25 interest rate reduction might drop your monthly payment by $75 or $100. However, this savings can be offset by increasing your loan balance by several thousand dollars. If you only save $100 a month and it takes five years to offset the refinancing costs, you break even and don't actually save anything. This scenario is particularly true for those who plan to stay in their homes for less than 15 years.
Average Length of Homeownership
According to recent data, the average length of homeownership in the U.S. is only about 8 to 10 years. This statistic suggests that the majority of homeowners do not stay in their homes long enough to benefit significantly from refinancing a 30-year mortgage to 29.5 years, given the average closing costs and potential savings.
Alternative Strategies for Early Mortgage Payoff
Considering the minimal savings from interest rate reductions, homeowners might want to explore alternative strategies to achieve financial security and reduce their mortgage term.
Bi-Weekly Payments
Instead of refinancing, paying more than your monthly payment in bi-weekly increments can help you pay off a 30-year mortgage in less than 24 years. By splitting your monthly payment into bi-weekly payments, you can effectively make an extra payment every year, significantly reducing the overall term of your mortgage.
Contact your lender to set up bi-weekly payments. This strategy doesn't require the hassle and cost of refinancing, and it offers a more straightforward way to achieve an early payoff.
Increasing Monthly Payments
Paying more than your monthly payment each month is another effective way to pay off your mortgage faster. By increasing your monthly payment by $10 to $100 each month, you can reduce your mortgage term by several years. This approach provides a clear and direct way to achieve financial security without the complexity of refinancing.
Conclusion
In conclusion, a .25 reduction in interest rates on a 30-year mortgage to 29.5 years is not likely to offer significant savings for most homeowners, especially if they plan to move within a few years. Instead, homeowners should consider strategies such as bi-weekly payments or increasing their monthly payments to achieve financial security and a faster mortgage payoff. These methods are often more cost-effective and provide a clear path to reducing the mortgage term without incurring the costs and complications of refinancing.