Should You ‘Restart’ Your 30 years Mortgage When You Refinance?

Banks Editorial Team · May 10, 2018

Perplexing most homeowners is whether refinancing your 30 years mortgage really like starting over again? People want to own their homes outright, and the thought of refinancing with a 30 years mortgage paves the way for unbidden gut feelings. One side of the spectrum bashes the idea based on its disadvantages whereas the other end is comfortable with the benefits of refinancing. In this regard, the answer rests solely on the homeowner and what they expect to achieve from refinancing.

The thought of winding back the clock to the start discourages any homeowner with a 30 years mortgage from considering refinancing. The idea that refinancing is like starting over often comes from individuals who do not get down to brass tacks. So far, the financial benefits accrued from refinancing a 30 years mortgage outweigh the disadvantages.

In particular, refinancing lowers the monthly payments, reduces the rate of interest, changes the loan to a fixed-rate mortgage from an adjustable rate mortgage. It can leverage the equity in the house to get a cash-out that pushes you further away from being on the breadline. Moreover, there are other options for refinancing such as prepay and refinance and prepay.

 

Why you Should “Restart” your 30 Years Mortgage

Restarting your 30 year mortgage has several advantages as well as downsides when you refinance. Notably, the benefits outweigh the disadvantages and include:

  1. Lowering monthly payments — Various researches conducted on this subject confirm that restarting your 30 year mortgage through refinancing can help homeowners save an
    average of $160 every month equivalent to $1920 per year.
  2. Removes private mortgage insurance (PMI) — Restarting your mortgage through refinancing can help you if you have enough principal paid off or property appreciation to avoid paying mortgage insurance and end up lowering your total monthly payment.
  3. Loan seekers often feel frustrated trying to identify a loan lender who matches their needs. More often, we encounter customers complaining about not being able to get the right lender. In this regard, we have prepared this list that compares lenders and their varied offerings.
  4. Decreases the term of the loan — Most homeowners prefer the 30 year mortgage, which to them likely makes a lot of financial sense; however, shrinking the loan term may appeal more to those seeking to clear their mortgage quick. So, through restarting, you can opt for a shorter loan duration.
  5. Switching to a fixed rate loan — Restarting your mortgage loan gives you options to reverse your adjustable-rate mortgage to a fixed-rate ensures that your interest rate does not fluctuate and remains constant throughout the term.
  6. Use the equity in the house to get a cash-out — the cash out refinance can offer additional financial aid such as fund a home improvement project, pay off debts, fund big purchases, etc.

 

Why Restarting your 30 Years Mortgage is a Bad Idea

On the flip side, restarting your 30 year mortgage has its better share of disadvantages. Refinancing your 30 year mortgage commences the amortization process, which may lengthen the payment period. For instance, if you have paid your mortgage for seven years then opt to refinance with a new 30 year mortgage, you end up making monthly payments for 37 years.

However, for some individuals, this plan sounds good. For example, if you have been paying your loan for 10 or 20 years, then the lifetime interest may not make financial sense in the long term considering the extra costs involved. Overall, the majority of homeowners refinance to shortened terms that do not lengthen the mortgage payment period such as a 15 or 20-year mortgage and often provides low-interest rates as opposed to a 30 year mortgage.

Other Options for Restarting your 30 Years Mortgage

Prepay

Instead of a shortened loan term with higher monthly payments, some homeowners prefer to prepay their mortgage. This mean, the homeowners commit some extra cash that will affect the principal amount. For example, instead of paying $743/month you pay $750 whereby the excess goes to the principal. Often, people determine how much to pay by rounding the numbers by tens or hundreds.

Refinance and Prepay

Also known as refinance-to-prepay, homeowners use this method to refinance their mortgage to a lower rate of interest without altering the loan term and then prepays the
new loan via total monthly savings. Refinancing helps reduce the monthly principal and interest payment, which results in savings that you send to the lender alongside the monthly payment. Therefore, over time, the excess savings you will be paying for the mortgage will continue decreasing the overall amount owed.

With knowledge of the benefits and disadvantages of refinancing and other refinancing options, you can now use our mortgage calculators to estimate what your new monthly mortgage payments might be after refinancing.

The financial benefits accrued from restarting your 30 years mortgage when you refinance outweigh the disadvantages because restarting lowers the monthly payments, reduces the rate of interest, changes the loan to a fixed-rate mortgage from an adjustable rate mortgage, and can leverage the equity in the house to get a cash-out.

 

 

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