| Many borrowers use a refinance to shorten the term of the
mortgage. And brace yourself: Even at low rates, a shorter term means a higher monthly payment. The
benefit is that you'll build up equity faster and pay far less in total interest over the life of the
loan. Consider Jim Neill, 48, a real estate broker and his wife Merrilyn, 55, a psychotherapist. Recently,
the couple took out a 15-year fixed-rate loan at 6.75% to replace an 8.13% ARM with a 30-year term.
Their monthly payment jumped by $200, but now they will own their own home outright by the time they
retire. In addition, the total interest on the 15-year loan will come to $95,447, vs. $222,234 on
the remaining life of the ARM - and that assumes their adjustable rate would have held steady at its
current 8.13%. "This is forced savings," says Jim. "When we retire, we can scale down and take equity
out of the house."
If you can't afford the payments on a 15-year mortgage, your next best means of building equity is
to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's
term to match the years that are left on your old loan - if you are five years into a 30-year
mortgage, for example, ask for a 25-year loan. |
