mortgage

What to know before you refinance

Longer or shorter term

Much less consensus exists on whether borrowers should refinance into a new loan with a longer or shorter term.

Don Frommeyer, senior vice president of AmTrust Mortgage in Carmel, Ind., says many of his customers prefer a slightly shorter term of perhaps 25 years, rather than 30, on their new loan, even if 26 or 27 years remained on their existing loan.

"The payment is going to go up a little bit, but they are reducing the term," he says.

Steve Thorne, a loan officer with Meridian Residential in Cary, N.C., has noticed a trend in the opposite direction. He says a lot of people are refinancing from a shorter term into a longer term "due to a job loss, a spouse's job loss or to cash out and consolidate debt."

Gwizdz recommends a customized approach that balances the borrower's need to reduce the monthly payment and make progress toward repayment of the loan. That might mean a new loan with a 20- or 25-year term or perhaps a term of 26, 27 or 28 years.

"We see people who bought a house in 2000, refinanced in 2003, refinanced in 2006 and are now going to refinance again. They have owned their home for nine years, and they still have 30 years left on their mortgage," he says. "They keep focusing on the fact that the payment is lower, but multiply the payment times the number of (additional) years that you are going to have to pay it, and you are actually going backward."

Fifteen-year loans have been a popular choice for homeowners who want to refinance. But Walters believes these shorter terms are appropriate only for homeowners who have substantial savings and excellent job security. Without those safety nets, he argues, there is a substantial risk that the significantly higher payments on a 15-year loan could become burdensome if you lost your job or suffered an illness or disability in the future.

A safer way to pay off a loan more quickly is to make payments on a 30-year loan as if the term were only 15 years. That way, "if life happens to you, you'll have the ability to fall back on a lower payment," he says.

The answer to the longer-or-shorter conundrum may depend on your response to a simple question, suggests Joe Metzler, a mortgage specialist with Mortgages Unlimited in St. Paul, Minn. He asks: "Do you need to lower your payment because times are tough or are you just looking to take advantage of today's rates?" If a lower payment is your objective, a longer term might be appropriate. If your motivation is to capture a low rate, you might want to consider a shorter term.

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