Is it possible to take out a 40 year mortgage and then refinance to a 30 year 3 years later?

Question

I know that a lot of people say that a 40-yr mortgage is not a good deal because you end up paying a lot of interest and the monthly payments are only slightly lower. But if that option was chosen anyway, would it be possible to refinance to a 30 year loan within the first five years so more equity can be paid in the house faster. In other words, is it necessary to keep the loan period to the 40 years even after refinancing? I would appreciate any help. Thanks

Answer 1

There are a few possibilities. You can do as you say and refinance in a few years - but you will only want to do that if interest rates have gone down. In that case you would want to refinance even if you weren't looking to change the term. There are costs associated with refinancing, so you can't do it frequently, but time it right and you can end up in a really good mortgage.

But... You are always allowed to prepay principal on a mortgage. You can take out a 40 year mortgage and as long as you don't have the cash you just make the regular payment. When you are ready to pay on a 30 year schedule just calculate the difference in payment and send the extra every month - ALWAYS with a note that the extra is to be applied to the principal.

The easiest way to play with the numbers is to learn a spreadsheet program - like Microsoft Excel has the @pmt() function that will help you understand it all. Short of that I'm sure the bank would be willing to answer questions like, "I want to be paid off in 30 years, how much extra principal do I need to send every month."

Answer 2

You can refinance to any loan term that you want, but if the rate on the 40-year paper is around the market rate for 30-year paper when you're ready to refi, you'd make out better just by upping the amount of your payments and keeping the 40-year note.

You can pay additional principal at any time, just include a note with your payment instructing them what to do with the extra money, i.e. apply it to the principal. This way, you avoid the cost of refinancing.

If you are expecting to re-fi, just make sure that your loan doesn't have a pre-payment penalty or that you wait until it makes financial sense to re-fi even with the pre-payment penalty factored into the costs.

Answer 3

Run the numbers but you should find the 15 year with the lower interest rate will save you money. Even better if you can afford to pay all or part of the closing costs up front rather than rolling them in (remember, rolling them in means you get charged interest on the closing costs also). The other factor is how long do you plan on staying in that house - figure that you need probably 3 to 4 years of residence to break even for the closing costs.

Answer 4

Yes you can. However if you are otherwise happy with the current terms of the loan, you can make extra payments against the principal of the loan. You can do this without having to refinance. Be sure to send these extra payments as a separate check with 'principal' printed in the memo field. Otherwise they will just apply it to your escrow account.

Answer 5

As long as your credit allows, you can refinance. Just make sure there isn't an early payoff penalty. Some have an early payoff penalty that can be up to 5 years.

Answer 6

Sure You can re-finance but, there will be charges involved. Just like when you first financed. Call a loan institution to find out more.

Answer 7

don't see any reason why you can't as long as you can afford to pay for the cost of refinancing. you have to shop around for better interest rate than what you're currently holdong with your current mortgae now.