Given the historic lows for interest rates, it’s a good time for homeowners to review their mortgage information.  It’s easy to get excited by low rates, but everyone should evaluate a new loan based on their current financial situation as well as their long-term goals.

Do the math to make a better decision on refinancing

When you refinance, look at the length of time you will be paying, as well as the monthly payments.

If you refinance into another 30-year mortgage:

Don’t make the mistake that better monthly cash flow always costs less in the long term.

For example, let’s review a 30-year loan for $400,000 taken out by someone in 2012.   They’re refinancing 8 years into the loan term.  Their current payment is $1,796; they have 22 years left, and will pay a total of $474,000 over the remaining years.  They owe $348,000 now and would be resetting the clock on the new loan.

At a rate of 2.75%, the payment drops to $1,421, a monthly savings of $375.  Sounds great so far.   But look at the total payments.  The lifetime loan cost is over $511,000. The new loan is $37,000 more.

Monthly payment: -$375   Total cost, over 30 years: +$37,000

If you refinance into a new 20-year mortgage:

The best way to mitigate the long-term effects in the above example is to consider a shorter term mortgage or to make extra principal payments.  A loan at 2.75% will cost $1,887 per month, a $91 increase for a 20-year term.  That brings the total payments under $453,000.

Monthly payment: +91   Total cost, over 20 years: -$21,000

There is no one-size-fits-all solution for refinancing a loan.

Look at the options and carefully consider your goals.

  • If you plan to move in the next few years, the benefits of refinancing may be substantially reduced.
  • If monthly cash flow is a concern, a longer-term loan may be better.
  • If you are focused on paying the loan down, or paying if off completely, a shorter term could be more appealing.


Loren Shapiro

Loren Shapiro

Thank you to Loren Shapiro, Senior Loan Advisor at Flagstar Bank.