If you’re considering mortgage refinancing to take advantage of todays lowest refinance rates you should know that there’s more to think about than just interest rates and fees. The term length you choose affects more than just your payment amount; it determines the total cost you’re paying your home including the finance charges. Here’s an article by Dan Green at TheMortgageReports.com explaining why a 30-year mortgage refi might not be the smartest choice for your next home loan:
According to Freddie Mac, as mortgage rates have dropped this year, so have loan terms. Between April-June 2011, of all the Freddie Mac-to-Freddie Mac refinances, 37% of homeowners who started with a 30-year fixed transitioned into 15-year or 20-year fixed rate loans. It’s the 30-year fixed fastest abandonment rate since 2003.
The downside of mortgage refinancing is that you’re resetting the clock on your home loan’s amortization schedule. Amortization is a term that describes the process of paying down your mortgage loan’s principle balance over time. Home mortgage loans are front loaded with interest meaning that in the early days of your payments the majority goes to paying interest and gradually over time that shifts to paying the principle balance.
Once you complete your mortgage refinancing the speed that you’re building equity in your home comes to a grinding halt as you’re mostly stuffing money in your lenders pockets. One strategy for combating this lack of forward amortization is just to keep paying the same amount you were paying before mortgage refinancing; the extra you pay each month will go directly to your principal balance.
You can learn more about refinancing your home mortgage without overpaying or falling for common mortgage mistakes by checking out my free Underground Mortgage Videos.