Refinancing for 20-Year Mortgages
Since mortgages are large home loans, they tend to last for an extended period of time, far longer than smaller loans for automobiles or appliances. Mortgages are measured in years, with 15-, 20- and 30-year mortgages all being common options. While each term length has its benefits, 20-year mortages typically try to combine the lower interest rates of short mortgages with the lower payments of 30-year mortgages. You can refinance into these mortgages, but you must pick the best opportunity to actually save money.
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Refinancing
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Refinancing is the process of replacing an old mortgage by getting a new mortgage. The refinance loan has a similar structure to the previous mortgage, but its terms can vary considerably. This is why few mortgages last their entire term: borrowers eventually use a refinance option to pay off the old mortgage and replace it with a new one with more favorable interest terms.
Mortgage Term Length
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The mortgage term length decides several key factors of the loan. First, it dictates the monthly payment that borrowers must make. While 30-year mortgages have the lowest monthly payments, they also require borrowers to pay more interest, since the interest rate is applied to the loan principal more often. People choose 20-year mortgages to reduce their total interest payments, even though their monthly payments are higher.
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Refinancing Rate Cuts
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Refinancing is a good option if it saves the borrower money in the long term. If the refinance loan does not save money through the interest rate and lasts as long as the old mortgage, it is simply lengthening the mortgage beyond the original twenty years and has no positive benefits for the borrower. If the borrower wants to stay with a 20-year mortgage, the refinance loan should have a lower interest rate. A lower rate, even on a loan of the same length, will save the borrower money by the time the loan has been paid down.
Good Times to Refinance
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Because wise refinancing depends on actions that lenders take in structuring their loans, borrowers interested in refinancing should watch the real estate market and economy carefully. When the market slows and fewer people are interested in buying property, lenders tend to raise their interest rates in order to keep their profit levels high, making it difficult for borrowers to find a refinance better than their original loan. When the market is active, competition tends to drive interest rates down, so borrowers will have a better chance of finding a superior loan option.
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