When you first took out a home mortgage loan chances are you took it out with either a 30-year- fixed mortgage or an ARM loan. While these are both great loans for getting you into a home, they are loans that require a significant investment of your time before they will be paid in full. It will take you at least thirty years to pay off the mortgage and own your home outright. Most of the time this is great and works for homeowners, but there are times you can save money by getting an FHA refinance loan and switching to a shorter term. There are pros and cons to this choice, but it’s worth considering if you’d like to pay off your loan faster.
Pros of the 15 Year FHA Refinance Loan
15-year-loans are offered to homeowners as a way to pay off the home faster. Because the homeowner will have the loan for less time, he is considered a lower risk and will usually be given a lower interest rate than that of a 30-year-fixed mortgage or an ARM. This can be a great advantage over the life of the loan. Once the loan is completely paid off, the interest rate paid out will more than likely be tens of thousands of dollars less than would have been paid on a thirty year mortgage. Thousands of dollars saved is like thousands of dollars earned.
Another great benefit to the homeowner is that the home builds equity faster. Typically on a loan, the interest is paid up front and the principle paid slowly over time. So the initial payments on a mortgage for the first five years are largely going to interest. On a 15 year loan the amortization works differently so the interest is paid down faster and the equity builds up more quickly. Within five years you can expect to have quite a bit more in equity than you would on a thirty year loan.
The last and most obvious benefit is that the home is paid off in half the time so you get out of debt faster. As an added bonus, the loan is being paid down in half the time but your mortgage payment isn’t twice as high as it would have been with a longer mortgage. This is a result of the reduced interest rates and increased amortization time.
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Cons of the 15 year Home Mortgage
While there are obvious financial benefits to an FHA refinance loan from a thirty to fifteen year fixed, there are a few downfalls as well. The biggest hurdle you’re going to come up against is the increased monthly mortgage payments. You can save money on the interest, but by cutting the loan time in half you will be required to pay higher mortgage payments than you would be paying otherwise. If you are in a financial place to do this, where the hundreds of dollars extra each month won’t be a problem, then you could really take advantage of the benefits.
A second disadvantage that will need to be considered is the fact that by increasing your mortgage payments you are putting yourself in a more vulnerable position financially. While you may currently be in a stable financial position with your job, you never know what events in the future might change that. If for some reason you hit financial troubles, the chances are you won’t be able to refinance into a longer loan to reduce the monthly mortgage payments, so you will be stuck with the higher monthly amount. Most financial experts recommend that you have a good nest egg in place before you put yourself in a slightly riskier position with your home, after all, you don’t want to take the steps to reduce your debt only to find yourself in a worse position because of a job loss.
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After weighing the pros and cons of the FHA refinance loan from a thirty to a fifteen year fixed you may realize that you are in the perfect place to take advantage of this. Your finances are good, your job is good, and you have a decent nest egg squirreled away. When you’re in a secure financial boat saving thousands of dollars and paying off the loan faster can be hugely enticing and for good reason. Nobody wants to stay in debt longer than absolutely necessary. Once you’ve determined that this is the right step for you it’s time to go ahead and get started on the refinance.