When it makes sense to refinance to a shorter mortgage

It’s not uncommon for a homeowner’s financial situation to change in the years after taking out their mortgage. And if that change is positive – because income has risen, expenses have dropped, or a windfall has been received – it can make sense to shorten the time that mortgage payments need to be made.

Refinancing can be a good way to do this, but it’s not for everyone and isn’t smart at all times. It depends on rates and on how many years are left in your current mortgage.

Although rates for shorter terms almost always run lower than 30-year fixed rates, whether it’s a good move for you depends on your original rate. You may find that today’s best 15-year rate is higher than your 30-year rate from a decade ago.

But rates are only part of the equation. How much time is left in your current term, and how long you expect to stay in your house, also bear considering. With just 5-10 years left on your mortgage, the only refinance likely to make sense is a 5-year adjustable rate mortgage. But if you have more than 20 years to go, refinancing to 10 or 15 years might pay off.

Knowing you’ll be staying in your home for the full term you’re considering is also useful. If it’s likely you’ll sell in the ensuing years, it’s probably financially smarter to avoid refinancing costs and, if you have funds available, make extra payments on your existing loan.

In all cases, of course, shortening your mortgage duration will increase your payment. While choosing a 15-year mortgage instead of one at 30 years won’t double your payment, your monthly obligation could be quite a bit more than what you’re used to. So consider carefully what level of payment feels comfortable to you.