Many people struggling with high mortgage payments are looking for a way to lower their payment and free up some extra cash for other expenses. Federal programs recently developed to help underwater homeowners focus on refinancing a mortgage as key component to alleviating mortgage debts and avoid foreclosure. Many mortgage lenders also push refinancing as their main offer for helping homeowners lower their monthly payment. However, refinancing isn’t for everyone and the end result could actually be more beneficial to the lender than the borrower.
Length Of The Loan
What many people don’t know about refinancing a mortgage is that the process cancels the existing loan and takes out an entirely new loan. When this happens, the borrower is then subject to all of the loan application steps and closing costs associated with obtaining a new loan. More importantly, the newly refinanced loan also begins its new term from the beginning. This means that if the refinanced loan is a 30 year loan, the clock on the life of that new loan starts over from zero.
Although this may not sound like a problem, consider the number of years paid towards the life of the old loan. If the borrower had paid 10 years towards their old 30 year loan and refinanced their mortgage into a lower interest rate 30 year loan, those 10 years are essentially wasted. Refinancing into a loan with the same loan term may save more in monthly mortgage payments, but is likely to cost more over the life of the loan.
If a borrower is going to refinance their mortgage, a 15 year fixed interest rate is advised. In many cases, the refinanced rate will still provide a decrease in the monthly mortgage payment, without the additional 15 years to the life of the loan. Homeowners are advised to consider how much of a reduction they truly need each month in their mortgage payment and not use refinancing as a way to free up a significant amount of cash.