20 Year Mortgages Offer Huge Refinance Savings

In the current economic climate saving money is more important than ever. Many people have taken advantage of record low current mortgage rates to refinance their current mortgage. Refinancing frequently saves money on a monthly basis and over the life of a loan. One of the downsides to refinancing can be that the borrower resets the length of their loan.  As we will see later, a 20 year fixed rate mortgage can be advantageous and allow you to own your house outright more quickly.

One of the basic tenets of lending is that the longer the borrower takes to pay back their lender, the more money in interest they will pay. The shorter the loan, the higher the monthly payment, but less money is paid in interest. Take for instance a 15, 20, and 30 year fixed rate loan:

Note: Current mortgage rates change each business day, often several times throughout the day. Rates quoted at 2:00 p.m. (EST) on Tuesday, March 2, 2010.
*All rates are calculated for borrowers with a credit score of 740+.
*All rates shown are based on a 30-day lock for a purchase or rate/term refinance.
*All rates are calculated with 2 points, 80% LTV, and $2000 in closing costs.

Many people cannot afford the high monthly payments that a shorter-term mortgage requires, and end up paying more money over the life of the loan in order to make the monthly payments more affordable.

As I mentioned previously, someone who wants to refinance but doesn’t want to go backwards in their amortization schedule should consider refinancing into a 20 year fixed rate mortgage.  Let’s take the example of someone that wants to refinance who is seven years into a 30 year fixed rate mortgage they got at a 6.25% interest rate (which was pretty typical in 2003).  If this person refinances into a 30 year fixed mortgage at 4.5%, they will save $363 per month and $105,112 over the life of the loan.  If this same person refinances into a 20 year fixed loan, they will only save $87 per month but they will save $181,081 over the life of the loan.  Additionally, they will own the house outright in only 20 years, compared to 23 years if they didn’t refinance at all, and 30 years if they refinance into a 30 year mortgage.

As you can see, refinancing into a 20 year fixed rate mortgage can be extremely beneficial in the long run, and will still save you money in the short term.  If you would like to see how much money Total Mortgage can save you, call us today at 877-868-2503.