Benefits of Refinancing a 40-Year to a 30-Year Mortgage
Some mortgage lenders offer 40-year mortgage terms as an option to get a lower house payment than with the standard 30-year loan. A homeowner who took a 40-year mortgage a few years ago may be able to refinance into a 30-year loan without a significant increase in payment.
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Pay Home Off Faster
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If a homeowner has a 40-year mortgage and there are more than 30 years left on the loan, refinancing to a 30-year loan will shorten the time to pay off the house. This obvious benefit may be enough reason to refinance. For the other benefits, an example of a 40-year, $200,000 mortgage at 6.5 percent taken out in February 2008 will be compared with refinancing to a 30-year mortgage in February 2011.
Lower Interest Rate
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A home loan with a 40-year term will have an interest rate of one-quarter to one-half percent higher than the 30-year rate. If rates have also declined since the 40-year loan was taken, a lower rate may make the refinance house payment as affordable. Using the example loan, the monthly payment on the 40-year mortgage is $1,171. In February 2011, Wells Fargo bank quoted 5.25 percent for a conventional 30-year loan. A $200,000 loan at this rate would have a payment of $1,104, less than the payment on the three-year old 40-year loan.
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Less Total Interest Paid
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The total interest paid on a 40-year loan is 40 to 50 percent more than on a 30-year loan paid to maturity. In the example 40-year loan, about $320,000 in interest will be paid in the remaining 37 years until the loan is paid off. Refinancing to a 30-year loan could reduce the total interest amount to under $200,000, using the February 2011 mortgage rates. At the quoted rates, refinancing results in a lower payment and a savings of $120,000 in interest.
Faster Equity Growth
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A 40-year mortgage has a very slow amortization schedule. After 10 years, only about 7 percent of the loan balance has been paid off. If the loan is refinanced to a 30-year loan, the balance has decreased by 7 percent in just five years and after 10 years almost 20 percent of the loan has been paid down. A decreasing loan balance results in increased owner equity in the home.
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