Should You Refinance to a Shorter Term Mortgage?

You might think that refinancing your mortgage to a shorter-term loan is a win-win: You save on interest and pay off your home sooner. But there may be other ways to achieve those goals.

To figure out whether paying your home off sooner makes sense for you, ask yourself these questions:

Can I afford a higher mortgage payment?

For some homeowners, especially those who have young families or who are cash-strapped for other reasons, squeezing an extra few hundred dollars out of the monthly budget and limiting access to ready cash may be a risk. Shorter-term loans offer lower interest rates but can come with substantially higher monthly payments. Since failing to make payments will harm your credit and could put you in jeopardy of losing your home, you need to be sure that larger payments fit your budget.

» MORE: Compare monthly and lifetime costs for 15-year vs. 30-year mortgages

Even if you feel confident about your ability to make bigger monthly payments, your debt-to-income ratio must be low enough to prove to a lender that you can afford it. For most loans, your DTI, including home-related expenses, should be no more than 36%, according to Fannie Mae, a government-sponsored enterprise that guarantees mortgages.

A higher DTI doesn't necessarily mean you'll be turned down for a loan, but it makes you unlikely to get a lender's lowest rate. Keep in mind that lenders include all your debt when calculating DTI. If you have substantial credit card debt or a sizable car payment, prepare yourself for a higher mortgage rate.

» MORE: Find current refinance rates