Does refinancing your loan always start over?
When refinancing, replace your old mortgage with a brand new one. That means you start the loan effectively from the beginning.
However, it is possible to refinance without restarting the term of your loan after 30 years.
With a little skill, you can take advantage of today's record-breaking mortgage rates and shorten the number of years of your loan remaining.
Here's what to do.
Check your eligibility (July 23, 2020)
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Refinance without extending your loan
As a homeowner, your mortgage is your choice. There is no rule that says you need to use a 30-year fixed-rate mortgage.
If you choose a 30-year mortgage, you are under no obligation to maintain it for the entire term.
You can refinance yourself or use other strategies to shorten your repayment period – and save a lot on interest payments.
The easiest way to do this is to refinance your mortgage in a shorter loan term.
For example, if your initial loan was a 30-year loan, you can instead refinance into a 20 or 15 year loan.
If you reduce the number of years of your mortgage, your repayment will be "accelerated" and your loan will be repaid faster.
Assume your current credit balance is $ 300,000.
Your current loan has a term of 30 years and an interest rate of 4.5%. You refinance yourself in a term of 15 years with an interest rate of 3.0%. Your monthly principal and interest payments range from $ 1780 to $ 2100That's an additional $ 320 a month However, you save a total of $ 101,000 in interest payments
Payments for a 10, 15, or 20 year mortgage are always higher than payments for a 30 year loan.
However, today's refinancing rates are so low that payments for a shorter loan term have become much cheaper than in previous years.
Before rejecting the idea of short-term refinancing, check how much your payment would be at today's interest rates and see if it makes sense to you.
Check if you can refinance a shorter loan term (July 23, 2020).
Pay your mortgage in advance instead of refinancing it
For many homeowners, the higher monthly costs of a shorter loan term are not included in the budget.
For this reason, some homeowners skip refinancing and choose to prepay their mortgage instead. You don't get access to new, cheaper interest rates, but you have better control over your loan.
If you pay your mortgage in advance, you will have to send "additional" payments to your lender each month, which will cancel the amount you owe faster than your redemption schedule.
If your mortgage payment is $ 1,750 per month and you instead send $ 2,000 to your lender each month;You reduce the amount owed on your loan by $ 250 each month. This will result in your loan reaching its "end date" earlier
The more you pay in advance, the more money you save.
The best option: “refinance to prepay” your mortgage
There is a third way to reduce your mortgage rates and shorten your loan term. It is called "refinancing until prepayment".
Refinancing to prepayment is exactly what it sounds like: you refinance your loan at a lower interest rate and then pay your new loan in advance (additional payments).
Refinancing through to prepayment gives you access to current mortgage rates and a faster repayment schedule.
To execute this strategy:
Refinancing at a lower interest rate for the same mortgage program (e.g. 30 years fixed) This results in a lower monthly payment. Apply all of your monthly savings monthly as an "additional payment" to your new loan. Do this until your loan is paid in full
The refinance prepayment system works because even though your mortgage interest rate is lower, you make the same payment to the bank every month.
You pay less interest due to your lower interest rate and your monthly broadcast bonus.
If you refinance to prepay, your loan will be "restarted" for 30 years, but you will ultimately repay it faster than you have ever refinanced.
Here's a real-world example of how prepayment refinancing works.
Your current credit balance is $ 400,000. You refinance yourself from the 4.75% mortgage rate you took out two years ago to a 4.00% mortgage rate without transaction costs After refinancing, your payment is $ 246 less per month
Just take these $ 246 savings and send them to your lender every month along with your regular payment.
Your “new” 30-year loan will pay off in 24 years. This is 4 years faster than without refinancing. Save $ 90,000 in these four years of no payments.
The math works even with final costs. You spend a little and save a lot.
Check your eligibility (July 23, 2020)
Understand your mortgage repayment plan
If, after a few years, you've ever looked at your mortgage statement and thought, "I didn't pay this thing back a bit!", Witness the effects of amortization.
Amortization is the payment schedule after which your credit balance increases from its opening balance to $ 0 over time.
The size of your capital and interest shares will change every month based on this schedule. And unfortunately, the amortization always favors the bank.
This means that the first few years of a loan require high interest payments and very little loan repayment.
Only if you have held the loan for a longer period do you pay more for your credit than for interest each month.
or example, if you borrowed $ 300,000 from the bank at a 4 percent mortgage rate after 10 years, you would still owe:
A 15 year mortgage would still have $ 123,000 or 41% of the original loanA 20 year mortgage would still have $ 180,000 or 60% of the original loanA 30 year mortgage would still have $ 237,000, or 79% of the original loan
With the 15-year home loan, more than half of your loan is paid out. With the 30-year mortgage, you have hardly made a dent.
This is one of the reasons why homeowners increasingly prefer 15-year refinancing over 30-year-olds.
Fortunately, today's interest rates are low enough to make 15-year mortgages accessible to many homeowners they couldn't afford before.
And even if refinancing doesn't make sense for you, you can take your repayment schedule into your own hands by paying your mortgage in advance. This shortens your loan term and can lead to large interest savings in the long term.
Today's refinancing rates
Refinancing rates are at their lowest in history.
There are millions of US homeowners with "in the money" mortgages. If you refinance, you may be able to do so without extending your loan. And you could save tens of thousands in the long run.
Check today's prices to see what you can save.
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