Refinancing Pitfalls to Avoid
Choosing the wrong refinancing term can cost more than anticipated. A common mistake is selecting a new 30-year term even after paying off several years of your original mortgage. Adopting a fresh 30-year plan resets the progress you’ve made, extending the payment period and increasing the total interest amount over time.
According to financial expert Orman, opting for a full-term refinance effectively wipes out the value of the years already paid. For example, if you have serviced five years on a 30-year mortgage, transitioning into another 30-year loan erases those benefits. A better approach is to select a term that corresponds with the remaining period on your current mortgage. In this scenario, choosing a 25-year or shorter term preserves the gains accumulated from previous payments.
A further consideration is evaluating how quickly the savings from a refinance will recoup the expenses incurred. Calculate the cost to refinance fully, then compare the difference between your new and current interest rates. Divide the total refinancing fees by the monthly savings amount to determine your break-even period. This figure is crucial because if you plan to leave your home before reaching this point, the financial benefits of refinancing may not be realized. If the break-even period lies between five and seven years and you expect to relocate or sell before that time, it may be best to hold off on refinancing.
Additional factors, such as the cost of points and closing fees, will further affect the overall outcome of a refinance decision. Each case requires a detailed evaluation of your remaining loan term, current interest rate, and anticipated duration of home ownership. Making an informed choice and selecting a term that reflects the outstanding balance on your mortgage is a sensible method for protecting your progress.
Taking the time to complete these calculations can safeguard the advantages you have made in reducing your loan balance, as you align your future plans with your financial goals. A thoughtful review of the available terms and cost estimates puts you in a stronger position when deciding on a refinance option that truly benefits your longer-term interests.
