Why Refinance Back into a 30-Year Loan?

Refinance Your Mortgage for Rate and Payment Reductions

One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. By refinancing, you pay off your existing mortgage and replace it with a new one. This can often be accomplished with a no-points no-fees loan program, which essentially means at “no cost” to the borrower.

In the no-points no-fees scenario, we use rebate monies paid by the lender to pay off non-recurring closing costs for you. These are “one time” fees such as escrow fees, title insurance, appraisal, lender fees, etc. The borrower is still responsible for recurring fees such as property taxes or homeowners insurance.

Refinancing typically occurs when mortgage interest rates drop significantly, but borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for better interest rates as well. If you haven’t checked your credit score in a while, it’s a good time to do so.

The question most asked is, “But why should I go back into a 30-year loan?”

There are two schools of thought on this subject. One option is to take the route of the “same payment” refinance, and actually pay off the loan faster and save money on interest fees in the long-run. If refinancing results in a lower monthly payment, you can continue making the same payment you made in the original loan, and the extra money will be applied to the principal balance.

For example: Let’s say you have 25 years remaining in your current loan, and you refinance back to a 30-year loan with a slightly lower interest rate, resulting in a payment reduction of $200 per month. You could then take that extra $200 per month and apply it toward the principal on the new loan. At this rate, the loan will be paid off in 22 years and 4 months, which is 2 years and 8 months less than the original loan.

On the other hand, if your financial planner is a proponent of best-selling author and investment guru Douglas Andrew’s philosophies (see Missed Fortune), he or she may suggest investing the extra money in a side-fund that could earn a better rate of return and grow to the amount of the mortgage (and beyond) in even less time. This method provides excellent liquidity, but having more direct access to this money may be too tempting for some homeowners.

Regardless of the reason for the refinance, we will need to know what the existing loan scenario entails, review your long-term goals, and provide a comprehensive spreadsheet that compares and contrasts the various loan programs available.

Bear in mind, refinancing to obtain a lower interest payment could also result in a lower deduction at tax time. The mortgage planner and financial planner should work hand-in-hand with their mutual client’s best interest in mind.