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Shorter Mortgages Bring Bigger Savings

At a time of near-record low mortgage rates, homeowners still can save tens or hundreds of thousands of dollars by financing for fewer years. That opportunity led one of three borrowers who refinanced in the first quarter of this year to switch from a 30-year mortgage to one lasting only 20 or 15 years (Freddie Mac , Aug. 12).

Financing for 15 years is less than one-half the cost of 30-year financing. But this example is based on the national average interest rate for a 30-year, fixed rate mortgage. Typically the shorter the mortgage term, the lower the interest rate, resulting in even greater overall savings.

Of course, a shorter term also means a higher monthly payment, so you must figure out how much more you can pay in the short run to save in the long run. Your credit union can help you figure out the highest monthly payment that works with your income and still allows you to save in the long run.

Here are some other things to think about before you commit to a shorter mortgage, according to CUNA's Center for Personal Finance:

Review all your Debts

If you're carrying a large credit card balance, you're better off eliminating that more expensive debt before paying extra on your mortgage.

Tend to your Retirement

A 401(k) plan is a type of retirement savings account offered in the US where the money becomes available when you are 59 ½. If you're eligible, you should be contributing at least enough to the plan to earn the maximum matching funds from your employer. If not, that comes before a faster mortgage payoff. And, as long as mortgage rates remain relatively low, you might choose a 30-year loan over a 15-year loan and invest the monthly difference in payments for your retirement.

 Consider the Stability of Your Current Income

Is your job reasonably secure? One way to hedge your bets is to take a longer mortgage and make extra payments on the principal whenever you can. Just one extra mortgage payment of $818 a year would shorten the 30-year loan in the figure to 26 years, saving $20,000 in interest in the process. The advantage of prepayment versus a shorter loan is that you're not contractually locked into a bigger monthly payment. You still can see significant savings over time while retaining the flexibility to skip an extra payment if you have unforeseen expenses. Mario from San Diego chose this option. He couldn't commit to continually making a higher monthly payment, so he tried to pay more at least one a year. "Although this means one month of the year may be a little tight, my mortgage will be paid off much sooner. This will allow me to save in the long run- it's all about looking to the future." 

Your Credit Union can help determine which path fits with your lifestyle and can still save you the most money.

By Kayla Sedbrook
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