Changing mortgage terms can be intimidating. There’s so much to know, and your budget and even your very home can be on the line. But the fact is, changing mortgages can provide valuable flexibility, and may even save you considerable money in the short and long term.
Your first mortgage got you in your home. But renegotiating your mortgage can open up better rates and terms, as well as giving you increased flexibility and control over your budget. If you’re unhappy with your current arrangement and are interested in changing mortgage terms, contact your mortgage lender and discuss any of the following issues:
- Adjustable-rate vs. fixed rate
- 30-year vs. 15-year term
- Cash-out refinance
Adjustable Rate vs. Fixed Rate Mortgage
There are two common mortgage loan types. Adjustable rate mortgages are loans that begin with a set interest rate for anywhere between five and ten years, and then have the rate rise or fall each year based on the market. Fixed rate mortgages, conversely, are loans with a fixed, pre-negotiated interest rate for the length of the payment.
Both have strengths and weaknesses, and depending on your situation, you could be better off moving from one to the other.
If you initially signed up for an adjustable rate mortgage, but your credit has improved, for example, you could consider changing mortgage terms to a fixed rate. Refinancing in this way would allow you to secure a more favorable interest rate, as your improved credit would make you eligible for better terms.
You might also consider changing mortgage terms to a more favorable adjustable rate mortgage, with smaller rate adjustments and a lower payment cap. Either way, refinancing towards a lower interest rate could result in smaller monthly payments while making a more significant dent in your principal, saving you money both short and long term and allowing you to build equity all the faster.
30-Year vs. 15-Year Mortgage
The term of your mortgage is variable, with the most common options being 30 years or 15 years. Changing mortgages to either a longer or shorter term will each have benefits and drawbacks.
Longer mortgages will have smaller monthly payments, but will ultimately cost more over the full term of the loan because of interest. Shorter terms, on the other hand, will have larger payments month-to-month, but there is less time for interest to add up.
Ultimately, this is about what fits with you and your family’s budget. But if you are refinancing your mortgage, it’s important to keep in mind that changing the length is an option. If your budget is larger now than when you initially established your mortgage, for example, switching to a shorter mortgage term could save you money in the future.
A traditional refinance changes your mortgage terms and replaces your initial loan with a new one for the same amount. A cash-out refinance is a unique option that gives you a new home loan for greater than the amount that you owe on your home.
The cash-out requires you to have equity in your home, and it essentially allows you to access that equity to pay off other needs. The difference between the loan and the amount you owe on your house goes to you in cash, and you can use it to pay down debts, invest in your property, and more.
A cash-out refinance will come with higher interest rates, because it is a larger loan. Cash-out amounts are typically limited to 80% of the equity on your home; for example, if the value of your home is $200,000, and you’ve paid off $100,000, that means you have $100,000 in equity and could cash out up to $80,000.
This can be a risky move, as the loan will have a higher interest and, inherently, a larger principal. But it allows you to take instant advantage of your equity. Especially if you use the cash-out to pay off other debts with higher interest rates, you can use a cash-out refinance to save money long term.
The Bottom Line
There are several ways to change mortgage terms in order to save yourself money short-term, decrease the amount you owe long-term, or just generally give yourself more financial flexibility. The above list is not comprehensive, but they represent many of the most beneficial ways people change mortgage terms.
There are a few essential things to keep in mind. Refinancing costs will vary from lender to lender, but you will have to pay several different fees throughout the process. Make sure that the flexibility and savings are worth the refinancing costs.
Once you’ve crossed that bridge, however, changing mortgage terms can be a great way to improve your financial standing. It can certainly be intimidating, and there is a lot at stake. But if you do the research and make the right decision, you can truly benefit.