Midlife Money Matters: Refinancing To A Shorter-Term Mortgage

Mortgage loan agent explaining the refinancing terms to a customer

If you’re in or approaching midlife, you’re probably thinking about retirement. A retirement that you would enjoy a lot more – or could better save for – by eliminating your debts. If you’re like most homeowners, your largest debt is your home loan. It’s the reason refinancing to a short-term mortgage can appear to be a good idea. But, is it?

A refinance to a shorter-term mortgage sets you on the path to amassing equity faster, paying your mortgage loan sooner, and saving on the cost of the loan because it lowers interest payments. But is it that simple?

We delve into this issue to comprehensively answer the question you have been asking: whether you should refinance to a shorter-term mortgage loan.

What Happens When You Refinance To A Shorter-Term Mortgage?

When you find a shorter-term mortgage and qualify for it, your monthly mortgage payments will increase compared to what you paid for the old loan. Even if you get a lower interest rate, the amount to pay per month will be high because you’ve lessened the life of your loan. But, by paying more, you build your equity faster, positioning yourself to take up credit opportunities in the future or selling your home at a profit. In addition, you will save interest because your loan will be paid in a shorter time than it would have been with a longer-term loan.

Unfortunately, taking up a shorter-term loan can lower your credit score. The reason is that when seeking refinancing, the lenders will conduct a ‘hard inquiry’ on your credit report, and in the short term, the inquiry can cause a dip in your credit score. Also, the very act of closing one mortgage loan and opening another could negatively affect your credit score.

Please note that although the dip from these actions is small and often recoverable, making several credit applications could compound the small dips into a pronounced decline in just a short time. So, if you choose to refinance to a shorter-term mortgage, plan the process in advance and only implement it when you’re ready, to minimize the impact on your credit score.

Summary of the Pros and Cons:

Refinance to a Shorter Term Mortgage: Pros and Cons
Pros Cons
Shortens the mortgage span Increases your monthly payments
Saves on interest Amount saved might not be worth the effort
Has a lower interest rate Temporarily dips your credit score
Builds equity faster Reduces tax deductions
Can cash out the equity for other loans May dig you deeper in debt as you apply for other loans
Can maximize your mortgage-free years Less savings

Should I Refinance To a Shorter Term Mortgage?

Pen sitting on a form with an ‘I agree’ checkbox

Your decision on whether to apply for a shorter-term mortgage depends on which is the most comfortable situation for you in the long run. After knowing the advantages and the pitfalls you might run into, here are additional questions that will help you arrive at your final decision:

Can my budget accommodate higher mortgage payments?

If your budget is tight, a few hundred dollars more per month can be too much, and you may fail to catch up on some essentials. So, prioritize your family’s welfare and refinance to a shorter-term mortgage loan when you can make larger payments comfortably.

Also, think about unexpected events like job loss, illnesses, and other financial setbacks that could affect your ability to make payments and raise the chances of a mortgage default. Do you have a large emergency fund that would take care of all expenses, including the mortgage payments? If not, you may need to delay the refinancing.

What are the tax implications if I refinance to a short-term mortgage?

There are many incentives attached to homeownership in America, including tax deductions. For example, you are allowed to deduct your interest payments from the taxable income annually. However, since the short-term mortgage lowers the interest you pay, you will no longer deduct as much as you did before, and this will further cut into your income.

Will I still comfortably meet other financial goals?

Think about your other household bills, debts you may be owing, and projects you’re undertaking. Can your budget fully cover these costs? Is there enough room for higher mortgage payments? Are you able to save a sizable amount of money every month? If your answer to these questions is not in the affirmative, it may not be prudent to commit more money to your home. Even if you have some extra cash, invest it in ventures that can grow your money, like life insurance policies or retirement accounts.

Will I be moving in the next few years?

If you’re only planning to stay for a few years more, it’s not a good idea to refinance to a shorter-term mortgage. Even if your budget can take it, the costs and fees of refinancing a mortgage might be more than the interest you may be trying to save.

Make Your Decision

Your answer to whether you should refinance to a shorter-term mortgage lies in your consideration of several factors: the pros and cons of refinancing, and your ability to afford the higher mortgage payments, without neglecting other financial obligations. If you plan to move in a few years, refinancing might not be a good choice because of the time you’d need to recoup the refinance costs. So, carefully consider all these factors and decide. You may also need additional resources and advice from LendMeMoney.com. Contact us today!