Should I Restart My Mortgage Term When I Refinance?

Should I Restart My Mortgage Term When I Refinance?

Does it make sense to reset your mortgage term if you’re looking to refinance your home loan?

This is a common concern that people express to us if they’re looking to refinance with rates so low. They express the concern, “I don’t want to reset my mortgage term. I mean, I’m two, three, four or five years into my mortgage. I don’t want to start all over at 30 years.” It’s a common misconception that by starting over you’re essentially paying more interest, and you kind of are in a sense, because if you just make the minimum payment, you’re starting over at the beginning of the term where there’s more interest than there is principal maybe compared to your current loan.

However, one thing that we coach our clients with is when you’re refinancing, you must lower your interest rate for it to be a benefit unless you’re pulling cash out to pay off other debts. When you’re doing a refinance to lower your payment, your interest rate’s going to be lower, so therefore you’re paying a lower rate of interest on the money you’re borrowing.

In other words, you’re applying that monthly savings to your loan term each month in the form of an extra principal payment. This is going to accelerate your loan payoff.  If there’s a true benefit to the refinance, this is something that we look at with every one of our clients to make sure that the refinance makes financial sense before we recommend moving forward. If it makes financial sense and you have that savings there, you’re going to pay off your loan, the new loan, much sooner than you would your old loan if you just continue to make the same payment.

An extra benefit of the refinance, if it makes financial sense, is that you’re going to have a lower payment, so you can fall back on that payment, if you lose your job, or you have other bills that particular month, you can make the lower payment because your interest rate’s lower. This is something we can help you look at, so just give me a call in the office if you’d like to look at your specific situation. We can run the numbers for you, see if it makes sense. We can project it out compared to your current loan and see how much sooner you’d pay off the new refinanced loan.

Give us a call at 303-670-0137 or email at baxterteam@fairwaymc.com