When you refinance your mortgage to get a lower interest rate, you can start all over with another 30-year home loan. But you don’t have to.
You have the option of refinancing to a shorter term — paying off the loan over 25, 20 or 15 years instead. This strategy can save thousands of dollars over the life of the loan.
Should you refinance back to a 30-year loan rather than choose a shorter term? Here are the advantages and disadvantages of starting over with another 30-year loan when you refinance.
Pros of refinancing back to a 30-year loan
Lower monthly payments: When you spread your new loan over 30 years, you get the lowest, most affordable monthly payments. If you choose a shorter term, such as 25 years, the monthly principal and interest payments will be higher.
More flexibility: With a 30-year loan, you have the option of making extra payments when you can afford to, and making minimum payments at other times. Maybe you would like to pay off the mortgage in less than 30 years. You can do that by adding an extra amount to your payments, thereby paying off the principal faster.
» MORE: Early payoff mortgage calculator
Cons of refinancing back to a 30-year loan
Costlier in the long run: When you refinance and start over with a 30-year loan, you’ll pay more interest over time, because you make more payments.
For example, let’s say you refinance for $300,000 with a 3.5% interest rate. If you pay off the loan over 30 years instead of 25 years, you save $155 on the monthly payments, but pay $34,406 more interest over the loan’s life.
A higher interest rate: Generally, interest rates on 30-year fixed-rate loans are higher than the rates on 15-year fixed-rate loans.
How to choose your loan term
When refinancing a mortgage, you can ask the lender to adjust the payments so you will pay off the loan over the time of your choosing, whether that’s 30 years, or 28, 25, 20 or some other number of years.
The way to ask is to say, “Please amortize this for 25 (or however many) years.” Mortgage amortization is the process of paying off the home loan with equal payments over an agreed-upon period. In the early years, most of each payment goes toward interest, and in the latter years, most of each payment goes to pay down principal.
Experiment with an amortization calculator to find a combination of interest rate, term and monthly payments that you’re comfortable with.
How many times can you refinance a mortgage?
You can refinance as often as you want, with a few exceptions. You pay fees with each refinance, so a bunch of back-to-back refis could end up costing more than you save.
The Federal Housing Administration and the Department of Veterans Affairs require the loan to be at least six months old before they will approve a streamline refinance, which involves less documentation than usual.