Length of a refinanaced mortgage depends on goals

Q: If you have 30-year fixed-rate mortgage with 20 years left and refinance, will it go back up to 30 years or stay at 20?

A: It depends what kind of loan program you choose when you refinance.

If you refinance with a new 30-year fixed-rate mortgage, then yes, your loan term would go back to 30 years. However, you could choose to get a new 20-year mortgage to keep your current loan term, or you could choose a 15-year mortgage to shorten your loan term and pay off your loan sooner.

Therefore, the choice is really up to you, depending on your personal financial needs and goals. Let me give you some specific numbers so you can see how this works.

Let’s assume you have a $300,000 balance remaining on your home mortgage and the monthly payment is $1,600 (not including property tax and insurance). If your actual mortgage balance is larger or smaller than $300,000 just mentally adjust the numbers below.

If you were refinance your $300,000 loan (I am ignoring closing costs for simplicity) with a 30-year fixed-rate mortgage at 3.5 percent interest (yes, rates really are that low!) the loan payment would be $1,347 per month, which is a savings of $253 per month. But you are also adding 10 years to the term of your loan. So if you were to keep the loan for the full 30-year term, you would pay more total dollars in loan payments ($485,000 vs. $384,000) but your monthly cash flow would be improved, and when you factor in inflation and the time value of money, you come out ahead. Not to mention the extra money you could make if you invest the $253 monthly savings.

But let’s say you don’t like the idea of extending the term of your loan. If you refinanced your $300,000 loan with a 15-year mortgage at 3 percent your payment would be $2,072 per month, which would be $472 more than you are currently paying. That would cost you an additional $84,960 over the 15-year term of the loan. But the total loan term would be reduced by 5 years (15 years vs. 20 years) which would save you $96,000 (60 payments times $1,600) for a net savings of $11,040.

You could also choose a 20-year loan term which would keep your loan term exactly the same as it is now, but the pricing on 20-year loans is usually not much better than 30-year loan terms so I recommend getting either a 30-year or 15-year fixed rate mortgage, depending on your financial needs and goals.

So it comes down to what is most important to you today and in the future: lower monthly payments today or less money paid out over the life of the loan. There is no “right” answer; it depends on your personal financial needs and goals.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at business@heraldnet.com.