If You Can, Go With a Shorter Term
For many people, refinancing a mortgage is a way to get cash for home improvements, to pay off other debts, or to save money with a lower interest rate loan. Another way to save a significant amount of money is to refinance into a loan with a shorter term.
For example, a $200,000, 30-year mortgage at a 5% interest rate will cost over $186,000 in total interest over the life of the loan. The same mortgage for 20 years will only cost $116,000 in interest, a savings of approximately $70,000. Of course, the monthly payment will be approximately $300 higher for the twenty-year loan, but the total savings are significant. When you refinance, think about the interest rate, but also consider whether the savings from a shorter term are worth the higher payment.