Refinancing can be less appealing for many homeowners because the clock resets each time. In some circumstances, especially if you’re a few years away from paying off the home in full a refinancing may even not make sense. Ways to refi without starting the term over…
The traditional 30 year fixed rate mortgage remains most favorable, so we’ll start there. Whether the purposes are strictly payment reduction, interest rate reduction or pulling cash out, the long-term does start over a new 360 months. With 30 year rates under 4.5%, opportunities to reduce payment by virtue of interest rate reduction are still abundant.
When starting over a new mortgage, and the payment is reduced, the key is to make the same payment on the new mortgage you are presently making on the current loan you are paying off. Doing so will allows you to benefit by reducing the interest, keeping the payoff time frame the same as the old loan, and the flexibility paying a lower payment should financial your financial situation ever change.
Here’s Example Figures:
Original loan amount taken out in January 2009 for $300,000 on a 30 year fixed rate mortgage at 5.5% current balance $282,000- mortgage payment $1703.37
New loan term 30 years at 4.375% on same principle balance of $282,000-mortgage payment $1407.98
Payment savings on 30 year mortgage $296 per month
A smart mortgage shopper would stand to benefit by taking out the new 30 year mortgage one full percentage point lower in interest in exchange for the savings just shy of $300 per month.
By making the $1703 per month payment, rather than the payment of $1407.98 that’s actually due each month with the new loan, the loan would be paid off in 21.3 years vs current 26 years remaining with the higher rate loan.
Mortgage Loan Terms That Don’t Start The Term Over
30 Year -At loan application, it would be ideal to avoid pulling additional ‘cash out’ . *Mortgage Tip: it’s going to require consistent diligence to be able to adhere to making an overpayment each month beyond the payment due. It’s easy to fall off the wagon, so perhaps a shorter-term fixed rate payment would be more suitable.
25 Year- is the next best option for homeowners to looking to continue to chip away at that principal balance. 5 years sooner on the pay off without making an extra principal payment.
20 Year- loan is paid off 240 months, which is one year sooner than taking the 30 year term make an extra principal prepayment. Again, expect a higher monthly payment without the ability to revert back to a lower payment should your financial situation ever change.
15 Year- provides the fastest payoff, in exchange for a payment that is nearly double the new 30 year mortgage for an additional 15 years of being mortgage free.
It is important to be mindful of the fact, not all the rates on each of these programs are the same. In many cases the shorter the debt structure the better the interest rate as well. For example the 15 year mortgage is the ‘standard’ for the lowest rates. Why is this? 15 year mortgages are much more attractive to the secondary mortgage market as most mortgages are refinanced every 5 to 7 years, if not sooner. A 15 year mortgage means the consumer is paying all the interest faster in a shorter period of time making the loan more attractive to the end investor.
Mortgage Tip: Expect for every rate quoted on a 30 year, expect one full percentage point lower in interest on a 15 year.
Tips To Make Sure Your Refinance Is Not Really A “Re-Set”
- Make sure you can handle making the old payment on new refinanced 30 year
- Keep loan amount lower than your original principal balance (this would include increasing the loan amount unless you switch to a shorter term such as a 20 year term or a 15 year term)
- Interest rate is the same or lower than current rate on loan being paid off
- If mortgage insurance exists on the loan being paid off and the new loan contains a higher interest rate, the removal of the mortgage insurance alone greatly offsets even a slightly higher interest rate on the new refinance. Reason being mortgage insurance (PMI) is usually anywhere from $200-$400 per month)
If you are trying to reduce interest expense or want to see if the numbers make sense for refinance, start now by receiving a free mortgage rate quote.