A common trend for streamline refinances is to convert an existing VA loan to from a 30 year term to a 15 year term. If a military veteran can comfortably afford to make the 15 year payments they can save a considerable amount of interest long term. 30 year fixed rate loans have interest rates of 0.25% – 0.50% higher than the market rate for a 15 year loans.
Because of an elongated amortization table, 30 year mortgages have much higher interest costs than the 15 year terms. In year one of a $150,000 loan on a 30 year fixed mortgage with an interest rate of 6.00%, a borrower will make a monthly payment of $899 per month. The interest expense represents nearly 83% of their payment in year one. The ratio of interest to principal does not become balanced until year nineteen.
Conversely, a 15 year mortgage has a much steeper amortization table leading to a more rapid payoff. In year one of a $150,000 loan on a 15 year fixed mortgage with an interest rate of 5.75%, the borrower makes a monthly payment of $1,245, but the interest represents only 58% percent of the total payment. Over the course of the loan the interest savings created from utilizing a 15 year fixed rate mortgage is just short of $100,000. The bottom line is if you can afford to make the payment take advantage of the savings by moving to a shorter termed loan.
