One common refinancing error occurs when borrowers reset their mortgage to a full 30-year plan after having already chipped away at the original term. This choice effectively cancels out the progress made with earlier payments, allowing extra interest to accumulate over an extended period. Mortgage expert Orman notes that renewing a 30-year term even after several years of payments essentially wastes the financial headway you have achieved.
When evaluating a refinance, it is wise to match the new loan’s term with the remaining period of your current mortgage. For instance, if you have completed five years on a 30-year loan, switching to another 30-year term means you would forgo the benefits of those initial payments. Instead, opting for a 25-year term—or even a shorter period—keeps your repayment schedule aligned with your progress and curtails additional interest costs.
It is also important to assess how long it will take for the savings from a lower monthly rate to offset the expenses of refinancing. Begin by calculating the total fees involved in the process and then compare those expenses with the monthly savings resulting from a reduced interest rate. Dividing your costs by the improved payment amount gives you a clear estimate of how many months it will take to recoup your outlay.
If this break-even period is estimated to be five to seven years and you foresee moving before that time, refinancing may not be a smart move. On the other hand, if you plan to reside in the home for a longer spell, the benefits of a lower rate could prove advantageous.
Keep in mind that additional charges, such as fees for points and overall closing costs, also play roles in determining whether it makes financial sense to adjust your mortgage. The decision to switch loan terms depends on your individual situation and long-term plans for the property.
Careful consideration of every expense and saving can make the difference in securing a financially sound refinancing decision.
