How Refinancing to a 30-Year Mortgage Can Backfire

by Christy Bieber | Updated July 19, 2021 - First published on April 12, 2021

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Don't assume a lower interest rate on a thirty-year refinance loan always means you'll save money.

When you refinance your home mortgage, you're going to have to choose what you want your payoff time to be on your new mortgage. There are several different options, including 15-year, 20-year, and 30-year refinance loans.

Many borrowers opt for 30-year refinance loans for the same reason they secured a 30-year mortgage. This long repayment term means you have decades to pay off your lender, so your monthly payments are pretty low. In fact, if you can get a mortgage refinance rate that's lower than your current interest rate while opting for a 30-year repayment term, chances are good you could reduce your monthly payment considerably.

Unfortunately, just focusing on reducing your monthly costs could be a bad financial decision. In fact, it's very possible refinancing to a 30-year loan could actually backfire if your goal is to make mortgage payoff cheaper. Here's why:

A 30-year refinance loan could make your total loan costs higher

Most people don't refinance a mortgage immediately. Instead, it's common to secure a refinance loan after you've been paying on your current home loan for a little while.

And that's where the problem comes in. Chances are good that your original loan was also a 30-year loan. If you've been paying on it for under 10 years and you subsequently take out a new 30-year refinance loan, you're resetting the clock on your payoff time. While you'd have been debt free in less time if you'd kept your current mortgage, you're now going to be stuck paying interest for a full three decades.

Unfortunately, the longer you have to pay interest, the higher the total loan repayment costs will be. So even if your interest rate decreases, tacking on several additional years of interest costs could mean you'll end up paying a lot more to your mortgage lender over the life of the loan.

Say, for example, you currently have a $200,000 mortgage at 4.25% that you took out in 2010. You'd owe about $153,733 on your loan now after making payments for over a decade. If you took out a refinance loan at 3.350% (without taking any extra cash out), you'd reduce your monthly loan payment by $306 per month.

That sounds great, except you'd end up paying $19,583 more in interest with your new loan than if you had kept your old one. Plus, you'd pay several thousand dollars in closing costs. So refinancing to this new loan at a lower rate would cost you more than $20,000 over time.

Everyone's situation is different, so it's possibly worth having an extra $306 in your monthly budget, if you use that money wisely. In that case, you'll want to refinance to a 30-year loan in order to lower your monthly payment.

But unfortunately, too many people focus on the reduced monthly payment alone. They don't see the added interest costs they are taking on when they refinance to a new 30-year loan. You don't want to make this mistake.

Instead, explore your options to refinance to a new loan with a similar payoff time than your current one or even a shorter one. You won't see your payment drop as much, even if you reduce your interest rate, and in some cases it could actually go up. But you should save much more money over time, which may be the better outcome in the long-run.

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