How to Calculate if You Can Refinance to a Shorter Term Loan

Refinancing to a shorter term loan allows you to pay off your home faster but typically means higher monthly repayments. The benefits of refinancing to a shorter term loan are that you can save on interest and speed up the process of owning your home. However, switching to a shorter term loan incurs costs.


A standard  mortgage calculator will help you establish what you can afford. In this situation, you’ll want to leverage a refinance calculator to determine the amount you would save each month if you refinanced at a certain interest rate. There are also costs associated with refinancing, so you need to take these into consideration when deciding if it makes sense financially. It’s important to find out the breakeven period. This is the time it would take for your monthly payments to recoup the cost of refinancing.


Questions to Ask Yourself Before Refinancing


There are additional factors to consider when thinking about refinancing. Consider the following questions before making a decision to refinance with a shorter term:


  1. Can I Afford a Higher Monthly Payment?

Shorter term loans tend to offer lower interest rates. However, less time to repay the debt can increase your monthly payment significantly. Be sure to check your budget to determine whether you could afford the increase before committing to a shorter term loan. Failing to meet your payments could affect your credit score and ultimately put you in jeopardy of losing your home. Carefully calculate your new budget to determine if refinancing may be right for you.


  1. How Much of the Mortgage Have I Already Paid?

Refinancing fees can fall between 2% and 5% of the remaining loan balance. Refinancing tends to benefit those who have a long-term mortgage and sizeable balance.


  1. Will Switching from an Adjustable Rate Mortgage to a Fixed Rate Mortgage Save Me Money?

An adjustable rate mortgage usually has an initial fixed rate period with a lower interest rate than other mortgage types. After this period, you may wish to switch to a fixed rate mortgage to avoid fluctuating payments, especially if you plan to stay in your home for a while. Refinancing to a shorter term loan does not benefit people who plan to leave their home before the cost of refinancing outweighs the interest saved on switching to a shorter term loan with a lower interest rate.


Can I Pay Off My Mortgage Faster Another Way?


If you are looking to pay off your loan faster, there are a few other ways to shorten your mortgage without incurring the cost of refinancing:


  • Divide how much you pay each year by 12 and add this amount to your monthly payment. At the end of the year you’ll have paid an extra month’s worth of the mortgage.


  • Change your monthly payments to bi-weekly, which could more quickly reduce your principal and interest costs because you’d end up making the equivalent of 13 months-worth of payments. Discuss with your lender and be sure to consider any setup costs.


  • Calculate the amount it would cost to refinance. Rather than following through, put that money towards your current mortgage.