Should you refinance to get a longer term?

Posted by  on Jun 12, 2012

If times have gotten tough financially, you may be considering a mortgage refinance to decrease monthly loan payments. When shopping around for a mortgage deal, it's important to look at all the terms of a loan, not just interest rates. One thing to consider is whether or not it makes sense to refinance into a mortgage with a longer term.

Cut monthly payments, pay more interest

Decreasing the amount of your monthly mortgage payments can free up more of your income for other expenses. It also can boost the amount of mortgage interest you pay over the life of a home loan. Qualifying for the best mortgage rates can help you get the payments as low as possible. In the past many financial experts advised against refinancing unless you could shave at least two percentage points off your interest rate. But changes in the economic climate have many Americans rushing to refinance even if they can only shave one percentage point and sometimes less.

Longer term, lower payments

Not only can getting a lower mortgage rate help, but increasing the term of your mortgage loan also may result in lower monthly payments. Decide if you really want to increase the amount of time it's going to take to pay off a home loan? If paying off your home as quickly as possible is important, getting a longer mortgage term may not be the right move. However, worry about getting laid off from your job or some other drop in income could be a reason to consider increasing the number of years it will take to pay off your home.

Work with a knowledgeable mortgage lender who can explain the various mortgage programs that might be available to help you. For instance, a fixed-rate mortgage can allow you to have predictable monthly payments that won't change over the life of your loan. But what if you currently have a 15-year mortgage that you can't afford to pay? Your loan officer should be able to help you determine if refinancing into a 30-year loan is smart if whether another 15-year loan can result in enough savings for your situation.

Role of home equity

Your mortgage lender can also run the numbers on shortening the term of a mortgage to find out if you can still save money. Although refinancing into a shorter term could result in higher payments, that isn't always the case. If you've built up a lot of home equity over the years, a mortgage with a shorter term may not result in a big jump in monthly payments.

Compare mortgage loans

Take time to compare refinance rates and packages from several mortgage lenders. There is no rule that says you can't refinance with your current lender. But a different mortgage company could actually offer you a better deal that can save you more money in the long run.


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