Q: You must be very secure and able to see into the future, but to recommend to others that they shorten the term of their mortgage is often inviting trouble.

What happens if one of a married couple loses their job? What if both spouses lose their job or get sick? Any number of things can go wrong and have an adverse effect on a family’s income. What do you do, ask the bank to reduce your payment and extend the amortization schedule when your income is reduced and you are in no position to qualify for credit?

However, if you take the longest amortization possible on your loan, you will be protected on the downside. You can pay down the loan as much as you want over the years. Oh, I can hear you now – most people don’t have the discipline to pay extra on their mortgage. Well in that case they don’t have the discipline to have a short term mortgage either.

I paid down my 30-year mortgage in six years. As a self-employed person, I am more aware than some of what can go wrong and I always leave myself breathing room.

I suggest you rethink your plan of shoving people into short-term mortgages especially in our current depression.

A: First, congratulations on paying off your loan in six years. Good for you.

As you’ll recall, the question you are commenting on was: “When is it a good idea to refinance?”

My answer has been the same for years: There are three primary ways to tell if you’re getting a great deal of a refinance:

  1. Lower the interest rates.
  2. Lower your monthly payment.
  3. Shorten the term of the loan.

The only way to save the most money (and know for sure you’re getting a good deal) is for at least two of these to be true. The best scenario is when you’re lowering the interest rate, lowering the monthly payment and shortening the term of the loan.

While renewing for a 30-year term might make sense for some people, you’re not maximizing the amount of money you can save. Which is fine, but some people want to do just that.

If you have already paid down 8 years of the loan, you’ll actually lose money in almost every scenario if you stretch the loan term back to 30 years. For example, if you have 22 years left on your loan, shortening the loan term to 20 or 15 years (preferably 15, and I’ll explain why in a moment) means you save years of payments on the mortgage. That translates into thousands of dollars.

The reason to go with a 15-year loan over a 20- or 30-year loan is simply the interest rate you’ll get. You’ll pay a lower interest rate (by maybe a half percent point) by choosing the shorter term loan. That’s how the finance world works. It’s less of a risk for a lender to do a 15-year loan than a 30-year loan, so the borrower pays less.

That extra half a percent translates into thousands of dollars of savings. Even if you make several extra mortgage payments per year, you’ll paying more in interest on a 30-year loan than a 15-year loan.

I agree that if you’re in a financially precarious position and you don’t know if you’ll have a job, or if you’ll have to take a pay cut, getting set in a 15-year loan might be a stretch. But, cutting back on the number of years you pay your mortgage is simply a good way to save money.