Refinancing Your Mortgage to Change the Terms

Many homeowners refinance to get a lower interest rate or pay for home improvements, but did you also know you can refinance simply to change the terms of your loan?

These types of refinances are primarily used to either shorten the length of the loan (from a 30-year mortgage to a 10-year one, for example) or lengthen it (ie, from a partially paid-off 30-year loan to a new 30-year one).

Term refinances can also bring other changes as well. If current rates are lower than on the original loan, it might mean a lower monthly payment. It also may mean less paid in interest over the life of the mortgage. A term refinance could also aim to change the type of loan you have (adjustable rate vs. fixed rate) or other details of your mortgage (removing prepayment penalties, etc.).

Let’s look at a few of these options more in-depth.

Refinancing to a Shorter Loan Term

This is the most common type of term refinance, allowing you to essentially pay off your current mortgage loan and replace it with a shorter-duration one. This typically means a higher monthly payment, but it also lets you pay off your mortgage faster. This can save you money on interest in the long term, and it also might help you achieve other financial goals (becoming debt-free by retirement, having more cash for college tuition when the kids grow up, etc.)

Here a few things to take into consideration if you’re thinking of this type of refinance:

• You might have a higher monthly payment. Know what your monthly expenses are (and what they’ll be if you refinance), and make sure you’ll still have the cash flow you need to cover everything
• You might not be able to save as much elsewhere, retirement, etc. A higher monthly payment might mean you’ll have less cash to put toward other investments or savings accounts. Make sure this is in line with your current financial goals.
• How long you’ll be in the home. At the beginning of any mortgage loan, your payments mostly go toward interest — not paying down the principal balance. Because of this, refinancing may not be in your best interest if you don’t plan to stay in the home long. In fact, you may actually lose money if you sell too soon.

Refinancing to a Longer Loan Term

Another option is to refinance your mortgage for a longer term. It might seem weird to do this (who wants to have debt for even longer?) but there are actually some serious benefits to this sort of term refinance.

For one, a longer-term loan means you can take advantage of the mortgage interest tax deduction for a greater period of time. Be sure to speak with your tax advisor to see if you may qualify. This can reduce your annual tax burden and help you save cash in the long run.

Refinancing to a longer term can also help you lower your monthly payment, first, by spreading out your costs over a longer period of time and second, with potentially lower interest costs (as long as you qualify for a lower rate than your current loan’s.)

Lower monthly payments, of course, mean more cash flow, but they can also give you more flexibility to reach your financial goals. You can put more toward retirement or college savings, or funnel more into the stock market or real estate investments. You might even be able to make money (not just save it) if you choose your investments wisely.

How it Works

A term refinance essentially gives you an entirely new mortgage loan. You’ll work with a lender, fill out an application (just as you did with your first loan), and they’ll approve you for a new mortgage with entirely new terms. That mortgage will be used to pay off your old one, and you’ll pay the remaining balance in monthly installments.

Put simply, it’s hitting reset on your mortgage, and starting anew — just with a different rate, loan length, or other details.

Other Reason for Refinancing

Changing the type of mortgage loan you have is also a common reason for term refinancing. If you currently have an adjustable-rate mortgage, your interest rate can fluctuate and your monthly payment can rise as a result. Refinancing to a different mortgage product — a fixed rate one, ideally — can lock you into a set rate and give you consistent, predictable monthly payments for the life of your loan.

Refinancing can also give you access to cash (for tuition, home improvements or to pay off debts) or it can help you lower your interest rate and monthly payment.

Should You Refinance Your Mortgage Loan?

Not sure if refinancing is right in your situation? Need help determining what type of refinance is best? Contact an Embrace Home Loans expert today to discuss your personal financial goals. We’ll steer you in the right direction.