When refinancing a mortgage, it’s usually because rates have dropped but there are other reasons as well. You might want to change the term of your loan, say switching from a 30 year loan to a 15. Or, maybe there’s a balloon payment coming up soon that you want to avoid. Maybe there are some marital matters to take care of and there’s a need to get someone completely off the current note. Whatever the reason, some may ask if refinancing is simply starting all over with a brand new loan. The answer is no, but there needs to be some other issues addressed.
For example, someone who took out a 30-year fixed rate loan a few years ago and decides to refinance to a lower rate, but still keep the original 30 year term might not enjoy the full benefits of refinancing. For example, someone who is five years into a 30 year term and refinances directly into a brand new 30 year term is effectively taking on a 35 year term. So with this example someone is in fact starting all over. But it doesn’t have to be this way. There are other choices that avoid ‘starting all over.’ This entails choosing the right term during a refinance.
Say someone is five years into a 30 year mortgage. Instead of taking out a brand new 30 year loan, there is an option for a 25 year term. In this example, while there will be a brand new mortgage, the initial 30 year term is left alone and replaced. The very same can be said with a 20, 15 or 10 year term. These are all some scenarios you need to talk discuss with your loan officer.
Okay, but what about someone who is 12 years into a 30 year loan? There are also lenders who will put you into an 18 year loan term instead of a 10, 15, 20 or 25 year. Whatever the remaining term of the loan, a lender can craft a new loan term to match your scenario. You’ll get the lower rate without having to ‘start all over again.’
One important thing to note, and again is something to discuss with your loan officer, the reason the 30 year term is by far the most popular when taking out a new mortgage is it provides the lowest monthly payment among traditional home loans. On the flip side, due to the longer term and lower payments, more interest is paid on the 30 year term compared to others. In addition, shortening the loan term will work in the opposite way. The monthly payment will go up, not down. Even if the new rate is lower than the existing one.
Finally, you’ll need to consider all the closing costs associated with getting a new mortgage. Remember, there really isn’t a ‘no closing cost’ mortgage, it’s simply an adjustment in the rate. You might be able to come to the closing table with less cash to close, but over time the higher payments will negate the advantage of the no closing cost feature.