The "Term Shortening" refinance
By Michael D. Larson • Bankrate.com

Kelley and Brian MacKay purchased their home during the mid-1990s using a Department of Veterans Affairs loan with no down payment. Seven years later, they're looking to refinance to cut their monthly payment and interest costs. But they're somewhat hesitant about getting another 30-year loan -- even though doing so would save them more than $200 a month -- because that could leave them with almost 40 years of mortgage payments.

"I was trying to just get our payment down," says Kelley. "But we've tried to look at all our options."

One of those options is to refinance into a shorter-term loan. Because rates have fallen by almost 2 full percentage points since the Carrollton, Texas couple got their original loan, they could get a 20-year loan instead of a 30-year one without blowing their budget. That would eliminate 3 years' worth of payments and still reduce their monthly payments by $51.

They haven't made a decision on how to proceed yet. But Kelley says they'll take action soon so they don't miss a good thing waiting for a great one.

"I've been just kind of waiting all these years thinking, surely they'll come back down," Kelley says. "I don't want to push our luck. They may slash them and they keep talking about it, but again, I don't want to wait around and then all of a sudden have them go up."

What other borrowers can learn from the Mackays
When rates fall substantially, consumers can knock years off their mortgages with little or no change in payments. In some cases, customers will be able to go from 30-year mortgages all the way down to 15-year ones, allowing them to own their homes sooner and pay less interest.

The MacKays could refinance without paying anything at closing too by rolling the loan costs into the loan principal, says Eric Gotsch. The regional vice president with J.P. Morgan Chase & Co.'s mortgage division reviewed the couple's data. While doing so technically pushes the refinance "break-even point" further out, the shorter loan term slashes their overall payment outlay and interest bill.

"Not only would it not raise his payments, it would reduce his payment and it wouldn't cost him a dime out of his pocket," Gotsch says. "This is a customer, because the rate of interest they're paying right now is so high at 8.5 percent, the current interest rate market can make a lot of the issues disappear."