I have been in my home 3 years and a month with a 30 yr fixed mortgage. I am thinking about refinancing for a lower rate. If I did that would I have to start over at 30 years on the mortgage or would it continue where I left off at?

Refinance Without “Restarting” Your Mortgage

Mortgage rates are at a 15-month low and it’s terrific time to refinance. But what if you don’t want to reset your loan to 30 years?

The good news is that you don’t have to. With a little bit of savvy, you can take advantage of today’s mortgage rates and shorten the number of years remaining on your loan. It all comes down to a financial term known as amortization (ah-mor-ti-ZAY-shun).

Amortization (ah-mor-ti-ZAY-shunis the payment schedule by which your loan balance goes from its starting balance to $0 over time; and amortization can be manipulated for your benefit.

According to Freddie Mac, the 30-year fixed-rate mortgage rate averages 4.23 percent nationwide — near the lowest rates of 2014 and the best since June 2013.

Homeowners are refinancing their loans to today’s low rates using a variety of programs including the HARP loan, the FHA Streamline Refinance, and the VA Streamline Refinance.

The result of refinancing is new, lower monthly payments. These payments include a portion which goes to “loan payback” and a portion which pays interest on the loan to the bank. Respectively, these portions are known as “principal” and “interest.

The size of your principal and interest portions change each month, based on the principles of amortization. Mortgage amortization will always favor the bank. The early years of a loan require large interest payments and include very little loan payback.

If you’ve ever looked at your mortgage statement after a few years and thought, “I haven’t paid this thing down a bit!”, you’re witnessing the effects of amortization.

If you were to borrow $300,000 from the bank at a mortgage rate of 4 percent, after 10 years, here is how much you would still owe :

  • A 15-year mortgage would have $123,000 remaining, or 41% of the original loan
  • A 20-year mortgage would have $180,000 remaining, or 60% of the original loan
  • A 30-year mortgage would have $237,000 remaining, or 79% of the original loan

With the 15-year home loan, you loan is more than half-way paid. With the 30-year mortgage, you’ve barely made a dent. This is one of the reasons why homeowners are increasingly think 15-year mortgages are better than 30-year mortgages.

It takes nearly 20 years to pay a 30-year mortgage down by half. Amortization can be bank-friendly.

Thankfully, you can use amortization to your personal advantage.

Two Ways To Avoid “Resetting” Your Mortgage To 30 Years

As a homeowner, your mortgage is your choice and you there’s no rule that says you have to use a 30-year fixed-rate mortgage, with the exception of USDA loans which only provide 30-year financing; and jumbo loans which are typically available as ARMs only.

For everyone else, the loan you choose is up to you and, increasingly, homeowners are taking amortization into their own hands.

One way by which homeowners are avoiding the reset is by doing a refinance loan into a new, shorter term.

If your beginning loan was a 30-year loan, for example, you can refinance into a loan lasting 20 years or 15 years instead. Reducing the number of years in your mortgage will “accelerate” your amortization, and pay your loan off quicker.

At today’s mortgage rates, homeowners using 15-year loans pay 64% less interest than homeowners using 30-year loans.

That said, the payments on a 15-year loan are 45% higher as compared to a 30-year loan. This is because the loan repayment must be compressed into a lesser number of years. For many U.S. households, that kind of increase can be too much to stomach.

This is why some homeowners skip the refinance and opt to “prepay” their mortgage instead. You don’t get access to new, lower rates, but you take better control of your loan.

Prepaying your mortgage means to send “extra” payments to your lender each month, which chips away at the amount you owe faster than your amortization schedule prescribes.

If your mortgage payment is $1,750 per month, and you send $2,000 to your lender, you’ve reduced the amount owed on your loan by $250. This will cause your loan to reach its “end date” sooner.

The more you prepay, the more money you’ll save.

Best Option: “Refinance-To-Prepay” On Your Mortgage

There’s a third way to reduce your mortgage interest paid. It’s called “refinance-to-prepay”.

Refinance-to-prepay is exactly what it sounds like — you refinance your loan to a lower rate then prepay on your new loan. With refinance-to-prepay, you get access to current mortgage rates, and a quicker amortization schedule.

Here’s how to execute :

  1. Refinance to a lower rate on your same mortgage program (e.g. 30-year fixed)
  2. Apply your entire monthly savings to your new loan monthly as “extra payment”
  3. Keep doing this until your loan is paid in full

The refinance-to-prepay system works because, although your mortgage rate is lower, you’re making the same payment to the bank each month. You’re paying less interest because of your lower rate and your sending bonus principal monthly.

When you refinance-to-prepay, your loan will “restart” to 30 years, but you’ll ultimately pay it off faster than had you never refinanced at all. It’s a math fact.

Here’s a real life example of how refinance-to-prepay work.

Say your current loan balance is $400,000 and you’re refinancing from the 4.75% mortgage rate you took two years ago to a zero-closing cost 4.00% mortgage rate available today. After the refinance, your payment will be $246 less per month.

Simply take that $246 savings and send it to your lender each month along with your “regular” payment.

Your “new” 30-year loan will pay off in 24 years. This is 4 years faster than if you hadn’t refinanced at all. Those four years of making “no payments” save $90,000.

Even with closing costs, the maths works out. You’re spending a little, and saving a lot.

Get Today’s Mortgage Rates Now

Mortgage rates are at their lowest levels of 2014 and pricing is the best that it’s been since last June. There are millions of U.S. homeowners with mortgages “in the money”. If you refinance, you can likely do it without “losing years” on your loan.

Compare today’s low rates now. Quotes are available online at no cost, with no obligation to proceed, and with no social security number required to get started.

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6 Thoughts on If you refinance your home, do you have to start over at 30 year mortgage again?
  1. Reply
    Rob
    January 26, 2014 at 1:04 pm

    If u can get at least 1.5% difference,
    u can get your closing costs back shortly.

    a refi restarts with new term.

    visit any mortgage calculator on web.
    to see what numbers u need.
    u can choose a 10,15,20 or 30 yr term.

  2. Reply
    dough ray me
    January 26, 2014 at 1:08 pm

    you can get a 15 year mortgage.

  3. Reply
    anasazi_chaco
    January 26, 2014 at 1:17 pm

    You can refinance to a lower rate, but your years will change from 30 to at least 50 years fixed mortgage rate.
    Message from: CliffDweller

  4. Reply
    MatthewM
    January 26, 2014 at 1:24 pm

    When you refinance, you are going into a new loan. Depending on the specifics of that new loan, you can be in another 30 year loan, a 15 year loan, or some other type of loan product. Interest rates are really low so I’d compare what you are paying now to what you could be paying and if you could pay more, then you could pay your loan off faster. However, I don’t think I’m the best person to give you advice, I’d speak with a loan officer.

    You can always use a mortgage calculator to figure out where you stand and where you will be before speaking with a loan officer. I think this is a pretty good calculator. http://alliancedirecthm.com/19-mortgage-calculators/

  5. Reply
    Angela
    January 26, 2014 at 2:18 pm

    You can choose the term of the refinance

    You only do it if you can save money. Say you started with a 30-year fixed rate mortgage of $ 150,000 at 5.5 percent but rates are now 4.5 percent. By refinancing at the lower rate, you would be able to save $ 91.65 on your monthly payments. the new mortgage will be 30 years again

  6. Reply
    Bills.com
    January 26, 2014 at 2:56 pm

    Your refinance loan is a new loan. That means you can choose the type of loan (Fixed Rate Mortgage or Adjustable Rate Mortgage), and the length of the loan.

    Most lenders offer loans at fixed lengths (10,15, 20. 25 or 30 years). However some lenders, such as Quicken Loans, have flexible loans. Read the BIlls.com article about Quicken Loans Yourgage mortgage at http://www.bills.com/yourgage/ .

    Given today’s low rates many borrowers are refinancing into 15-year fixed rate mortgages at under 3%..

    Evaluate your goals, the difference in the monthly payments and the overall financial savings, depending on the length of time you will stay in the home. If you want lower payments, then extend your loan. If you want to maximize your savings then choose a shorter term. Your lender will look at your DTI (debt to income ratio) and a lower term loan will have a higher payment.

    I recommend that you use the Bills.com refinance calculator to compare your loan against real mortgage rates. You can get different quotes based on different goals and mortgage terms.

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