Refinance your mortgage without extending the term

By Ken Go

OBVIOUSLY, the simplest way to refinance without extending the term is to select a new mortgage with a shorter term. How do you refinance your 30 year loan after paying for a few years to another 30 years loan without extending the terms is the question. This is what banks don’t really want you to know in order to keep you paying your mortgage sometimes without really paying it off.

The best method is to refinance at the same term or a shorted term, but increasing the payment by the amount required to amortize over the period you wish. Let me explain:

“I want to refinance my 5.25% 30-year mortgage, taken out in 2006, without starting the 30-year amortization period all over again. I read recently that the best way to do this is to borrow an amount equal to the original balance, then immediately prepay an amount equal to the difference between the original balance and the current balance. Do you endorse this?”

No, there are better ways to accomplish your objective.

Assume you took out a $250,000 fixed-rate mortgage in 2006 for 30 years at 5.25%. Your monthly mortgage payment was $1380.51. If you made no extra payments, your balance 5 years later would be $230,373.72. You now have an opportunity to refinance at 3.625% on a new 30-year loan, but you want to pay off in 25 years, as you would have if you hadn’t refinanced. There are 2 ways to do this.

Shorten the Term

The simplest way is to make the term on the new loan 25 years instead of 30. Then your new payment will be $1168.80, which would still be below your current payment. The rate on 25-year loans is usually the same as that on the 30, but 20-year terms carry lower rates.

Increase the Payment

A much better alternative is to refinance the current balance for 30 years, but increase the payment by the exact amount you were previously paying $ 1380.51, instead of paying $1168.80 which will take you for another 25 year full interest payment.

The beauty of this approach is that it is exact. If you are able to continue the $ 1380.51 payment, that means you are actually reducing your principal balance from day 1 by $ 211.00 and that is all applied towards your principal reduction therefore will translate to your term reduction. Now your savings, if this is applied you would have saved additional 5 years and 7 months of interest payments totaling $ 29,551.87 and paid off in less than 20 years. If you would have stood still now and do nothing you wont enjoy the savings, even if you sell or refinance again, your balance would have been much lower due to your principal reduction options. This option is a zero cost loan where you don’t have to pay lender fees, escrow fees or title fees.

Of course, the extra payment is not obligatory, which can be viewed as a drawback or an advantage. It is a drawback if you lack the discipline to pay more than you are legally obliged to pay. It is an advantage if you have the discipline, and value the flexibility of being able to skip the additional payment in a pinch.

Of course if your objective is to reduce your monthly mortgage payments, based on this example a $244.00 decrease in your monthly payments translate to about $3000.00 a year in savings. Which compounded will add up to a nice sum of cash you can use to pay a car or enjoy a yearly paid vacation. So, there is more benefits to being able to refinance your payment.

My best advise is to be able to refinance without any out of pocket loan fees and no closing cost added to your loan balance.

If you are refinancing again, remind your lender that you don’t want to pay closing cost and also you want a no points no fees loan. Don’t get fooled by just looking at the rates being offered, remember to look at the overall picture. A “No Cost” loan might be worthwhile for you to do without having to pay cost to line up pockets of your lenders.

Paying closing cost will take years to break even on the payment adjustments, if you happen to refinance or sell within less than the break-even period, you would have lost that money.

Please call me if you have any questions pertaining your existing mortgage or new mortgage, there are a lot of refinancing options even for FHA Streamline where they might actually not require an appraisal done on the property. Please call Ken Go of 1st Innovative Finance Group at 562-508-7048 or write to kennethgo@verizon.net.