Does Refinancing Reset Your Loan Term?
When considering refinancing, a common question that arises is whether it will reset your loan term. The answer depends on the type of refinancing you choose and the terms you negotiate. In this article, we’ll explore how refinancing impacts your mortgage term and what options you have to avoid starting over from scratch.
How Refinancing Affects Your Loan Term
Standard Refinancing
Refinancing generally involves taking out a new loan to replace your existing mortgage. In most cases, this means resetting the loan term, typically to 15, 20, or 30 years. For example, if you refinance with a 30-year mortgage, your new loan term will likely be 30 years, regardless of how many years you’ve already paid on the original loan.
Cash-Out Refinancing
With a cash-out refinance, you borrow more than you owe on your current mortgage, with the difference paid to you in cash. This type of refinancing also resets the loan term, often extending the period over which you’ll make payments.
Shortening vs. Extending the Term
When refinancing, you have the option to either shorten or extend your loan term. Shortening the term (e.g., from a 30-year to a 15-year mortgage) can help you pay off your home faster and save on interest, but it will increase your monthly payments. Extending the term reduces monthly payments but increases the total interest paid over time.
Pros of Resetting Your Loan Term
Lower Monthly Payments
One of the main benefits of resetting your loan term through refinancing is the potential for lower monthly payments. By spreading the mortgage over a longer period, you reduce the amount due each month, which can free up cash for other expenses.
Access to Cash
A cash-out refinance allows you to tap into your home’s equity, which can be used for various purposes like home improvements, paying off debt, or funding major expenses. While this resets your loan term, it also provides financial flexibility.
Opportunity to Lock in Better Rates
If interest rates have dropped since you took out your original mortgage, refinancing can lock in a lower rate. Even if this resets your loan term, the savings from a reduced interest rate can be substantial over time.
Cons of Resetting Your Loan Term
Paying More Interest Over Time
While resetting your loan term can lower monthly payments, it also means you’ll be paying interest over a longer period. This could result in paying more in total interest than you would have with your original loan term.
Restarting the Clock
Refinancing effectively restarts the clock on your mortgage. If you’re 10 years into a 30-year mortgage and refinance into another 30-year loan, you’re now committed to 30 more years of payments, potentially delaying your mortgage payoff by a decade.
Potential for Increased Costs
Refinancing comes with closing costs, which can add up. If you’re resetting your loan term, these costs may offset the financial benefits of refinancing, particularly if the new term is longer than the remaining term on your current mortgage.
Strategies to Avoid Resetting Your Loan Term
Opt for a Shorter Term
To avoid extending your debt period, consider refinancing into a shorter-term loan, such as a 15-year mortgage. While your monthly payments might be higher, you’ll pay off your mortgage sooner and save on interest.
Making Extra Payments
If you’ve refinanced and reset your loan term, you can counteract this by making extra payments on your mortgage. This strategy helps reduce the principal faster, effectively shortening the loan term without formally adjusting it.
Refinancing with Your Current Term
Some lenders allow you to refinance with a term that matches the remaining years on your current mortgage. For example, if you have 20 years left on your mortgage, you can refinance into a 20-year loan, preventing a full reset of the loan term.
Alternative Options
Loan Modification
If your goal is to adjust the terms of your mortgage without resetting the loan term, consider a loan modification. This process can change your interest rate or monthly payments without requiring you to take out a new loan.
HELOCs and Home Equity Loans
Instead of refinancing your entire mortgage, consider using a Home Equity Line of Credit (HELOC) or a home equity loan. These options allow you to borrow against your home’s equity without resetting your mortgage term.
Refinancing Only When Necessary
Evaluate whether refinancing is the best option for your financial situation. If the primary goal is to lower interest rates or payments without changing the loan term, explore alternatives like rate negotiation with your current lender.
Debunking Common Myths
Myth 1: "Refinancing always resets your loan term."
While refinancing typically resets the term, there are options to maintain your current payoff schedule.
Myth 2: "You can’t refinance without starting over."
You can refinance with a loan term that matches the remaining years on your mortgage, avoiding a complete reset.
Myth 3: "Refinancing is only about lowering interest rates."
Refinancing can be a tool for accessing equity, consolidating debt, or changing loan terms to better fit your financial goals.
Conclusion
Refinancing your mortgage doesn’t have to mean starting over with a new loan term. By understanding your options and planning strategically, you can take advantage of refinancing benefits while minimizing the downsides. Whether you choose to refinance into a shorter term or explore alternative options, the key is to make a decision that aligns with your long-term financial goals.
