Mortgage Refinancing Without Resetting the Clock
For many homeowners, the thought of refinancing can be less appealing because the clock resets each time you re-mortgage. Essentially, you could be turning back the clock to 30 years each time you refinance. In some circumstances, especially if you’re a few years away from paying off the debt in full, a refinance might not make sense. You’re in luck though. For the overwhelming majority of homeowners, there are ways to refinance without starting over a new loan term.
A Real-Life Example: Let’s start with the most popular mortgage term, a traditional 30-year fixed-rate mortgage. Whether the purposes are strictly payment reduction, interest rate reduction or cash-out purposes, the loan-term will start over a new 360 months, no two ways about it.
With rates near a low 4 percent, opportunities to reduce payment by virtue of rate reduction are still plentiful. When starting over a new term, and the payment is reduced, the key is to make the same payment on the new mortgage made on the current loan sought to be paid off. Doing so will ensure you benefit from lower interest expenses, a faster payoff time and, of course, ability to make lower 30-year payments should your financial situation ever change. This scenario is best described in a real-life example:
The original loan amount taken out in January 2009 is for $300,000 on a 30-year fixed-rate mortgage, with a 5.5 percent current balance of $282,000 and a mortgage payment of $1,703.37. The new loan on a 30-year mortgage at 4.375 percent on same principal balance of $282,000 means a new mortgage payment of $1,407.98. That’s a savings potential of $296 per month on a new 30-year mortgage.
A prudent consumer with stand to benefit by taking out the new 30-year mortgage over one full percentage point lower in interest in exchange for the savings just shy of $300 per month. By making the $1,703 monthly payment, rather than the payment of $1,407.98 that would actually be due each month, the loan would be paid off in 21.3 years instead of the current 26 years remaining with the higher interest rate. Moreover, this homeowner could always revert back to the lower monthly payment in case of financial hardship. As long as the same payment that was being made on the previous loan is made on the new loan that contains a lower monthly payment, the loan can be paid off much sooner.