Is Refinancing Your Mortgage Always a Good Idea?


The possibility of a lower monthly house payment would be welcome by any homeowner, but lower payments aren’t always what they seem. And what about those are not in a position to refinance, are they out of luck?

Some may be better off for not refinancing. Refinancing, even for a lower rate and payment, isn’t always the bargain it seems to be. There are some elements of refinances that lenders can and do massage in order to make refinances more appealing than they really are.

Now as a former mortgage originator, I’m fully aware of the math calculations used to compute the viability of a refinance. Top of the list is the “closing cost recapture period” — dividing the upfront cost of the refinance by the monthly savings to determine how many months it will take to recapture those costs before true savings are achieved. (The “standard” is usually 24-36 months.)

But I’d argue that in the very different housing market and uncertain economy we now find ourselves with factors beyond math calculations that have to be considered.

Loan term

One of the ways homeowners lower their payments in a refinance is by extending their loan term. A longer term translates to lower payments because the principal repayment is spread out over more years.

Let’s say that you’re currently ten years into a 30 year loan — you have 20 years left to pay. If you refinance your mortgage and in the process reset the loan back to 30 years, you will lower your payment, but you’ll add another ten years of payments to your loan.

If you do refinance, make sure the term of the new loan matches the remaining term of your existing mortgage, otherwise you may be at least partially buying your lower payment by adding many years of payments on the back end of the loan.

Extending the loan term is common with refinances, and can give the appearance of greater savings than is actually true.

Closing costs

A former mortgage customer of mine recently called about refinancing his mortgage. After explaining that I was in “mortgage refugee retirement,” he said that he had been approached by a lender who was offering an extremely low rate for him to refinance. But there was a catch: on a loan amount of just over $200,000 he would pay $8,000 in closing costs and another $6,000 for prepaid taxes and insurance.

In order to get his ridiculously low rate, he’d have to incur upfront costs totaling $14,000. Now like a lot of homeowners, he didn’t have the spare $14,000 in order to complete his refinance “investment”. The lenders solution? Add the closing costs and prepaid expenses to his new loan balance. He goes in owing $200,000 and comes out owing $214,000—does that sound like a good deal?

This is standard operating procedure in the mortgage world—sell the homeowner on rate and payment. If you’re also a rate-and-payment junkie, keep a couple of things in mind. First, the borrower is sacrificing equity in a declining market; second, should selling his home become necessary, he will be impaired by this transaction.

Never be anxious to “buy” a lower rate with a higher loan balance. The housing market of the past few years has left homeowners needing to protect equity as much as anything else.

Oh, and in case you’re interested, my former customer didn’t do the refinance.

Plan B

Changes in the mortgage lending industry—as well as declining equity—have made it difficult or even impossible for many homeowners to even qualify for a refinance. If you’re one of those who can’t get a loan, don’t fret. There is another way–want to know what it is?

Payoff your mortgage.

Painfully simple and definitely “old school”, it was how people handled their mortgages until about a generation ago. Maybe you can’t pay it off right now, but you can accelerate the payments and pay it off much quicker than you think.

Use a mortgage amortization tool to see how much more quickly you can eliminate your mortgage with just a little bit of extra money paid each month. And since this is income tax filing time, you can get a jump on the process by using part or all of your tax refund to paying your mortgage down. Using a combination of tax refund money and extra monthly payments will move it even faster.

And here’s a bonus: as your mortgage balance declines the interest charge will drop too. High interest rates don’t seem so high when the amount of money owed is lower.

What’s often misunderstood about mortgages is that the ultimate goal is to pay them off and to own your home free and clear (Proverbs 22:7). But in the past few decades it’s become a shell game we play, turning mortgages into perpetual debt in the quest for lower payments, debt consolidations, and equity cash-outs. Lenders love this game too. Their goal is to keep us in debt—that’s how they make their money.

Our goal should be to keep that from happening.

Have you ever refinanced? Was it a good decision for you? When is the right time to refinance? Leave your thoughts in the comments section below.

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  1. We refinanced from a 5.25% to a 4.25% in late 2010. We paid closing costs out-of-pocket and I expect a return of my original investment by the end of 2012. We did extend out loan term out for another 30 years, with the goal of keeping our payment level and paying the difference in extra principal to pay it off far sooner. This gives us some added flexibility in the future, but for now we are paying the same as we did on our 5.25% loan.

    One surprise in all this was that we actually ended up paying slightly higher closing costs because we did not want to cash out any equity. I could have had this low rate with lower closing costs if I had borrowed at least $150,000, but since our outstanding mortgage was somewhat lower than that, I ended up having to pay an extra hundred bucks or so in loan origination costs. I know that this is market-driven, and banks have to make their money (and the closing costs were still very reasonable, so this was not a big deal), but it is interesting how lending practices tend to foster carrying more debt in unanticipated ways. We went into this with the thought that this refi was going to be a tool for paying off our mortgage sooner, and we stuck to that, but it would have been so easy to say “sure, we could use the extra $$ for home improvements,” etc.

    • Hi J–Like I said in the post, the goal of lenders is to keep us in debt. You’ve done a good job of keeping the payoff of your mortgage in your sites but so many homeowners put the blinders on with refinance and do the opposite. The goal should be elimination of the mortgage.

      • Agreed. We’re pretty disciplined with our finances (we have to be; I am the sole income for our family of four). Probably the better choice for someone who isn’t sure of their level of discipline would be the 15-year mortgage, or as you say just pay it off early instead of a refi.

        Back in our DINK days, when my wife and I were both working, I walked into the bank and presented them a check to pay off our car loan almost four years early. They looked at me incredulously and said “was there a problem?!?” I said no, we just had been working towards this goal and saved up our cash. But inside I was thinking yes, there is a very big and obvious problem . . . you’re paying me half a percent in interest on my savings account and loaning it back to me at seven and a quarter! It was like they thought I walked in from outer space.

  2. We sort of refinanced- but also completely changed the structure of our mortgage. We now have a sort of HELOC ( There was a small fee to get out of our previous mortgage arrangement but it wasn’t that bad. We were able to roll some left over home renovation debt into the mortgage (we bought a fixer-upper) which was handy since our reno’s had dramatically increased the value of our home and we also got a lower interest rate. Our interest rate is variable but so far it has stayed nice and low. We have the option of locking in if we get scared that the interest rates are going to jump. What we did is NOT for everyone but has worked well in our situation and provided us with some extra flexibility which has allowed us to take advantage of some opportunities that we wouldn’t have been able to otherwise.

    • Hi Marianne–the HELOC may have worked get you past the moment, but long term it’s a ticking time bomb. There are two problems with HELOCs–one is that they’re variable rates, and the other is that they generally are not self-amortizing (or contain provisions that make doing so undesireable).

      Since we now have the lowest rates on record, now would be a good time to lock it in. As the saying goes, “better a month early than a minute late”. Rates rise much more quickly than they decline.

      • Yes- we do have the option of locking in some or all of our ‘mortgage’ at any time if we are afraid of rising rates. I will say though that a lot of people were saying to lock in awhile back, that the rates were going to go through the roof… but they didn’t and we were glad that we didn’t lock in at a higher rate then.
        I say that we have a HELOC because I don’t know what else to call our ‘mortgage’ and most people that are not familiar with our type of mortgage are at least familiar to the HELOC which I would say is it’s most familiar counterpart. It’s a little different than that though. I don’t know if you have similar products in the States but I’ve blogged about it and it’s called the ManulifeOne account. I absolutely wouldn’t recommend it for just anyone though- without discipline it would result in disaster!!

  3. Good article, one to make a person think about debt. I am no expert and I have spent far too much over the years. We just finished refinancing. 6.85 to 3.75. The bank will not sell the loan we paid the closing cost, $1,800.00. Lowered our payment $400.00 month and we will have it paid off in 18 years by paying 1/2 mortage every 2 weeks. I think we did ok. What do you think?

    • Hi Terry–I agree. You lowered your rate by more than two points, and you have a plan to pay the loan off early. Keep it up. The key is not to use refinances to extend your leverage–too many have made that mistake.

  4. We are currently in the process of rolling a $25K HELOC (used to help our kids with college costs) and a $105K mortgage into a new 10-year mortgage that we got at 3% with 0 points. We have a little less than 6 years remaining on our current 4.75% 15-yr mortgage but I am concerned the HELOC variable rate will rise all too soon. Currently we can only pay the interest on the HELOC. By rolling both into 1 loan & paying the same amount we currently do for both the mortgage & HELOC interest, we will have both paid off in a little over 6 years. Of course, being disciplined is key to all this. I will NOT manually pay the additional money; I plan on setting up automatic payments so I won’t “accidently forget”. Additionally, we plan on putting any extra money we may find towards the mortgage, hoping to pay it sooner than the planned 6 years.

    Does anyone see a fault in this logic that we couldn’t see ourselves? If so, please let me know, as I still have time to cancel the refi – we haven’t signed the final papers yet.


    • Hi Kathy–No errors in your logic, none at all. You’re eliminating an enormous HELOC, with it’s variable rate provision, and replacing it with a fixed rate. I’d call that dodging a bullet! That HELOC will start to get ugly as soon as rates rise and getting rid of it is the best possible mortgage strategy you can have at this point. A fixed rate locks in your rate for the term of the loan and interest rates are no longer a threat to your financial well being.

      Also, taking a 10 year loan is a brilliant strategy, if only because you’ll be paying it off in substantially less than the typical loan term. 10 years is really more like an extended car loan than a mortgage, and when it’s over you’ll be on easy street.

      Any strategy that enables you to payoff your mortgage quickly is a winner–you’re heading in the right direction.

  5. We had some friends get their home appraised to try and refinance it and they found the appraisal was actually under what they owed on it and couldn’t do it. Refinancing is not always possible–and some times a worse way to go.

    • Hi Nate–That’s why I suggested concentrating efforts on paying off the current mortgage. That’s really the object of a mortgage, to reach the day when you can have a mortgage burning party like they did way back when at a time when people realized that debt really is a bad thing. It won’t lower your payment, but it’ll get you to where you need to be in the end.

      Paying off your mortgage is the main goal–a refinance is only a tool that may make it easier to do–or not!

  6. We refinanced our home a little differently I guess you can say. I know not everyone can do this, but it seemed good for us. Owing only 12,000.00 we opened a few 0% credit cards and are paying it off with them. This lowered our payments by 200 and saved us 4% interest (counting the 3% transfer fee). We were then able to take that 200 and use the snow ball effect to help pay off the credit card due soonest. I feel this has worked for us as we have seen a larger amount paid off faster and now we are so close I can smell it! It’s a great feeling. I know you have to be careful to make payments on time and not miss any, so for someone who has trouble with doing this shouldn’t even think of it or set up automatic payments. Just wondering what others thought. Is this crazy or creative? All I know is it has worked for us and, Lord willing, in a couple months we’ll be debt free.

    • That is an extremely risky way to pay off your mortgage. It can work out better mathematically if everything goes perfectly, but what happens when an emergency comes up and you have large bills to pay; 19% interest is what happens! I hope it works for you, but wouldn’t recommend this method for others. God bless!

  7. Laraba

    We’re right in the middle of a refinance that will change our rate from 4.75% to 3.0%. My husband is a number crunching guy and we’ll make up the closing costs in less than 2 years. We intend to continue our high payments — we were already paying $500 more than was required each month, and now it will be $1000 more. Our loan is quite large ($170,000) but we should still be able to pay off the whole thing in 5 or 6 years. And I am HAPPY. I’m one of those people who loathes being in debt and it’ll be a great great day when the mortgage is paid off. As an aside, this is our college planning strategy as the first of our EIGHT children will be just about college age when the mortgage is paid off. We’ll have quite a bit of money freed up for college costs after we pay off the mortgage. Of course, all this planning is just planning and things could happen to derail our time table, but this is where we are headed.

    • Laraba–As long as you’re serious about paying off the loan in 5-6 years, it sounds like a good deal. But could you payoff the loan quicker with the current loan? You must be a few years into that loan right now. Not a big deal though, you’re heading down the right path.

  8. Donald

    How much harder is qualifying for a mortgage if you already have one? My wife and I have a mortgage and we would eventually like to move. We have an additional 2-3K per month. We bought at the wrong time so we are naturally under water. Should we concentrate on paying down the mortgage or saving up for another home and renting our current home out? I know the latter doesn’t make as much – if any – financial sense…but we don’t agree with the ethics of walking away, so we will not go that route.

    • Hi Donald–Are you planning to move because you have to, or because you want to? Unless you have to, I think the thing to do is to stay put and paydown the mortgage. You don’t want to take on new obligations if you have a problem with an old one. Clean up one mess before moving onto another! We can never know what the future holds so it’s always best to move forward with a clean slate.

  9. Kendi

    I have some questions: I have a current mortgage at 4.75%. I have it set up to pay bi-weekly about 3 years ago. Now for the last year I have been manually paying 800.00 extra towards the principal. My first questions is, would it be wise to refi and get the intrest rate down and absorb the fees knowing that my goal is to have my current loan paid off in 8-9 years max?

    2nd question I am not sure how to figure the bi-weekly into my current calculations on payoff..
    I can do a mortgage calculator for the current amount that I owe & the extra that I am paying extra and it shows I should on time to pay off in 8 years, but since I am also paying automatic bi-weekly will that pay it off sooner?

    I hope this is not a stupid question, I am still in the process of learning all this new be debit information.

    • Hi Kendi–Bankrate has a biweekly calculator here

      The problem is that it won’t allow you to factor in additional payments over and above the biweekly payment. Is it $800 per year, or $800 per month? Either way, if you’re making additional payments above the biweekly, you will pay your loan off sooner.

      As to the refinance, at 4.75% you’d only be able to drop your rate about 1 point, so you have to be careful how much you pay in closing costs. My thought is that if you refi, go with a ten year loan so you don’t add years to the payoff. But if you’re on track to pay the loan off in less than 10 years you might not want to incur the refi cost period.

  10. Benny Wasserman

    My wife and I are in our late 70′s. We are in the process of refinancing for the third time. We have no desire to pay off our mortgage. We only want additional money every month. Becasue we are dealing with a credit union, I believe the theft is the lowest in the business. It is true that my kids will get less when we are gone. If we don’t use the additional monthly income now, not knowing what our health status will be in years to come, what good will a paid off mortgage be?

  11. We have 5.5 years and 55K left on our mortgage but it is at 5.3%. When I use online calculators, it looks like a refinace to lower the interest rate will not benefit us much, when you consider closing costs and the fact that we are paying mostly principal now anyway. Am I correct in my thinking?

    • Hi Lori–I think you’re thinking right. With 5.5 years to go you’re talking about a mortgage that’s the length of a car loan, and 5.3% isn’t terrible either. Also, most lenders won’t want to do a mortgage for a five year term. And the closing costs aren’t worth it for 5.5 years. If you want to do anything I’d concentrate on paying extra principal so that you will get rid of the loan even sooner. To put it in football language, you’re now inside the ten yard line and going in for the touchdown.

  12. Hello Kevin, you post and Q&A is very helpful understanding the process, a million thanks for sharing this knowledge with us.

    2 years back (in 2010) I took 296k loan @ 4.375 for 30yr fixed, now i am in this hosue for 2 years, i am getting mail at home for refi at 3.25 at closing cost of $ 2900, would it be wise to go for it. as i learned from your post, i should ask them to see the savings at 28 years instead 30yr and see if the savings are enough to cover the closings cost or not.

    or should i just leave it where i am at 4.375% , house current value is 315k.

    • Hi NK–Since you have 28 years to to, dropping the rate by more than a full percentage point is a good idea. Ask them to do a side by side comparison at 28 years and see how much you save. Also tell them you’d like to build the closing costs into the rate so that you don’t add to your principal balance.

      VERY IMPORTANT–It looks like you have mortgage insurance on the loan–be sure that’s reflected in the new monthly payment. If you’re home has dropped in value since purchase, the mortgage insurance may be higher than what you’re paying now. They should be able to do some kind of streamline refinance that won’t affect this, but please pay careful attention to that number. It could change the entire outcome.

  13. Michele T.

    I purchased my home in the year 2000 with an adjustable rate of 7.5%. In 2003 I refinanced with a fixed 6% rate, with a loan amount of $111,000, now my loan amount is around $92,000. I have the opportunity to now refiance through a FHA Streamline loan at a fixed 3.75%, 30 year loan. The one thing I’m worried about is I have a mortgate insurance on my loan that I can have removed once I reach a loan amount of $87,000 (I’ve been paying extra in my principle to get to this amount quickly), but if I refiance I will have to go back to scratch and pay off 20% of my loan again to get rid of the mortgage insurance. I also don’t like the fact of the years that will be added back on my loan. If I do refinance I know I can save at least $200 a month. Would it be in my best interest to refinance?

    • Hi Michele–You’re in a tight spot here. Ask the lender to provide numbers based on keeping the loan term at the same number you have remaining on the current loan. If you have 21 years to go on the current loan, set it up as a 21 year loan. Then compare the payment with your current payment. That will show how much you’re really saving.

      Some of the savings in the new payment are based on the fact that you’re going back to a 30 year loan–that isn’t an apples-to-apples comparison.

      As to the mortgage insurance, that isn’t a deal breaker if your rate is dropping from 6% to 3.75% but it will make a difference. Also see how much in the way of closing costs will be added to your new loan.

      The combination of the shorter loan term, the mortgage insurance and the closing costs added to the loan will probably answer your question.

  14. Can you tell me in lay terms how a second mortgage(HELOC) affects financing of the first loan. Our first loan is fixed interest for 30 years, but there is not enough equity in the home for the second mortgage or HELOC to be absorbed at a fix rate. Any information you can give on the HELOC. The HELOC was not used for any thing other than to help with the downpayment.
    Thank you.

    • Hi Sandy–Without seeing your paperwork I can’t say this with any certainty, so here’s my best guess. With the drop in property values in so many locations, lenders are doing nothing more than straight refinances of existing mortgages, and in the process, they are rejecting efforts to include 2nds and HELOCS with the refi of the first mortgage.

      If you don’t have enough equity to refi both the first and 2nd/HELOC, with room to spare, they won’t do the refi, and certainly not at a preferred rate.

      But that’s just a guess.

  15. We are paying 4.25 on 140.000 for 30yrs and we have been in this home 2 yrs. We have been told we can refinance our home with 3.25 for 30 yrs for 1900 which is putting us back two years. Should we take offer?

  16. We are about to refinance our home for 3.5% interest from 5.25, w/zero closing costs. But it is resetting our loan term back to 30yrs. We are already in 9yrs. So we have 21 years on our current loan. My husband thinks this is a good idea because we can continue to pay the same amount we pay now & finish sooner. I haven’t crunched the numbers but I’m not so sure. I’m just nervous that this isn’t a good idea. Please help.

  17. Laz Echemendia

    I still owned 59000 to the bank from my 74000 original loan. They are offering me a better interest rate (from 6.24 to 4) but the closing cost, etc, will add up $ 5000 to 64000.Is this worth it?
    I’m totally confused. Can some body help me?

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