Pay Off Your Mortgage Early

Refinancing to a shorter-term loan means you may reduce the number of years in the term of your loan. A shorter repayment loan generally provides:

Benefits

A shorter repayment period can help you:

• Pay down your mortgage debt more quickly. Repaying your loan in a shorter time period may allow you to focus on other priorities such as a child's college tuition or saving for retirement. 
• Reduce the overall cost of interest. Although your monthly payments on a shorter-term mortgage will likely be higher than on a longer-term mortgage, you will also likely pay less interest over the life of the loan.

Considerations

While faster repayment with a shorter-term loan has its advantages, keep in mind:

• You may have higher monthly payments due to the shorter loan term.
• You may have a smaller tax deduction on mortgage interest than you'd typically have with a longer-term loan. (Consult your tax advisor on the deductibility of interest.) 
• You'll pay origination charges as well as closing costs if you refinance to get a new loan.

When interest rates are low, you might consider refinancing your mortgage. Refinancing may allow you to replace your current loan with a new mortgage that has better terms. Here are some of the potential benefits of a refinance.

Increased cash flow

• Your loan's monthly payment typically decreases with a lower mortgage interest rate.
• With a lower payment, you can use the extra funds for retirement savings, paying other debts, saving money for college, or other purposes.

Potential to switch to a different loan type

• If you have an adjustable-rate (ARM) or a balloon mortgage, reduced interest rates may make a fixed-rate mortgage more desirable, especially if you want the stability of an interest rate that does not change over time.
• If you have a long time left on your mortgage, lower interest rates may make it possible to switch to a shorter-term mortgage.
  • You can pay the principal balance down and build equity faster.
  • You may pay less interest over the life of the loan with a shorter term loan.

Opportunity to access the equity in your home

• While you're lowering your interest rate, you may want to consider using the equity in your home to pay for major purchases or to make home improvements. This type of loan is known as a cash-out refinance.
• See how much available equity you have for a cash-out refinance with a free refinance analysis.

Your home may be the largest asset you have. Before deciding to refinance, be sure to consider the following so you can make an informed decision.

Determine your estimated costs

When you refinance, you may pay:

• An origination charge , which may include fees such as application or processing.
• Discount points to lower your interest rate further. (May be tax deductible. Consult your tax advisor regarding deductibility).
• A prepayment penalty if your current loan has a penalty for early payoff.
• Other settlement charges such as appraisal, credit report, title search, and title insurance fees.

Assess how much longer you'll stay in the home
If you plan on owning the home for an extended period of time, and the interest rates are 1/2% to 5/8% lower than your current rate, refinancing may be the right choice for you.

Determine your break-even point
Your break-even point occurs when the cumulative monthly payment reduction from your new loan equals the cost of getting the new loan. 

Additional considerations
Keep in mind that you are starting over. Refinancing replaces your existing loan with a new one. If you refinance to a term that is the same as your original loan, you may pay more interest than you would if you refinance to a term that is the same as or shorter than the remaining term of your original loan.

Use our refinance calculator to help determine if refinancing may be right for you.

If you obtain home financing, you'll repay more than the amount you borrowed because the amount you repay is determined by several factors, including the interest and loan amount. Here are some terms you should understand.

Interest rate

• The interest rate is the percentage of your loan amount we charge you to borrow money.
• Interest rates are based on current market conditions, your credit score, down payment, and the type of mortgage you choose.

Discount points

• One point equals 1% of your mortgage amount; however, 1 point will typically reduce the interest rate by less than 1%. If you qualify, you may be able to pay one or more points to lower your interest rate. A lower interest rate typically means lower monthly mortgage payments.
• Points are usually tax deductible. Consult a tax advisor regarding tax deductibility. On refinances you may be able to finance points as part of your mortgage amount.

Origination charge

• On a mortgage, this amount includes charges (other than discount points) that all loan originators (lenders and brokers) involved will receive for originating the loan.
• The origination charge covers items including fees, document preparation, and underwriting costs, and other expenses.
• On refinances, if you qualify, you may be able to finance the origination charge as part of your loan amount.

Loan term

• Your loan term is the amount of time you have to pay off your mortgage balance.
• Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates.
• If you pay off your mortgage balance within a shorter term, you may pay less in total interest than with a longer-term mortgage.

Remember that interest rates only tell part of the story. The cost of a mortgage is reflected by the interest rate, discount points, fees, and origination charges. This cost is known as the annual percentage rate (APR), which is typically higher than the interest rate. The APR lets you compare mortgages of the same dollar amount by considering their annual cost.

Monthly mortgage payment

Your monthly mortgage payment is typically made up of four parts:

• Principal. The part of your monthly payment that reduces the outstanding balance of your mortgage.
• Interest. The part of your monthly payment that goes toward the cost of borrowing the money.
• Taxes. The part of your monthly payment that goes toward property taxes charged by your local government. We typically collect a portion of these taxes in every mortgage payment and hold the funds in an escrow account for tax payments made on your behalf as they become due.
• Insurance. The part of your monthly payment that pays for homeowners or hazard insurance, which provides protection against losses from property damage due to wind, fire, or other risks. Like taxes, insurance costs are usually collected and paid from an escrow account.

Depending upon your property location, property type, and loan amount, you may have other monthly or annual expenses such as mortgage insurance, flood insurance, or homeowner association fees.

Video - The components of a mortgage payment

Watch this video to understand what makes up a typical mortgage payment - principal, interest, taxes, and insurance - and how they can change over the life of the loan. 

When you apply for home financing, we generally use these four main criteria to assess your application.

Income

Do you have a reliable, continuing source of income to make monthly payments?

• Income can come from primary, second, and part-time jobs, as well as overtime, bonuses, and commissions.
• You may use other sources of income if you want them considered for payment, provided they can be verified as stable, reliable, and likely to continue for at least three years. Some examples include retirement or veteran's benefits, disability payments, alimony, child support, and rental or investment income.

Current debts and credit history

Do you pay your bills, loans, credit cards and other debts on time?

• We examine your payment habits before deciding to loan you money.
• We also review your credit history and credit score.

It's a good idea to check your credit history and correct any problems before applying.

Assets and available funds

Do you have enough funds for a down payment (if you're buying a home) and closing costs?

• You may use funds from various accounts including savings accounts, certificates of deposit (CDs), investments, and retirement funds.
• If you're buying a home, in some cases, you may be able to use gift funds toward closing costs and all or part of your down payment.
• Generally, you'll also need to show that you have additional funds in your accounts to cover several months of mortgage, tax, and insurance payments.

The property

What is the market value of the property you want to finance?

We will order a property appraisal to make sure the value of your property meets our underwriting requirements.

Responsible lending guidelines

We approve applications where we believe the borrower has the ability to repay according to the terms of the financing. We use two ratio-based guidelines to evaluate your ability to repay.

Debt-to-income ratio

Debt-to-income ratio is the percentage of your monthly income that is spent on monthly debt payments.

• We compare your expected monthly mortgage payment (principal, interest, taxes, and insurance) plus other monthly debt obligations to your gross (pre-tax) monthly income.
• Mortgage program guidelines vary, but a good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income. 

Housing-expense-to-income ratio

Housing-to-income ratio is the percentage of your monthly income that is spent on monthly housing payments.

• We also compare just your expected monthly mortgage payment (including taxes and insurance) to your gross monthly income.
• Mortgage program guidelines vary, but a good rule of thumb is to keep your housing expense level at or below 28%.

Even if you fall within the 28%/36% guidelines, make sure you're comfortable making your monthly mortgage, insurance, and tax payments, in addition to all of your other monthly payments. Remember that homes have other costs — such as utilities, maintenance, and repairs — that may not exist if you rent.

How to calculate your ratios

Other choices to consider

Refinancing is not your only choice for repaying your mortgage quickly. As a no-cost repayment option, consider sending additional principal payments with your regular payments.

• Principal payments will decrease the loan balance, reducing the overall interest owed.
• You can send any amount, whenever you have additional funds, such as when you get a tax refund or an employment bonus.

Learn more about setting up automatic mortgage payments or home equity account payments.

If you're facing payment challenges, don't wait another day. We're here to help you understand your options.

• Get help with payment challenges
• Call 1-800-678-7986
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