Refinance your mortgage without “starting over” at 30 years

Dan Green
The Mortgage Reports contributor

Does refinancing always start your loan over?

The short answer is, yes. When you refinance, you’re replacing your old mortgage with a brand new one. That means you effectively start the loan over.

But it is still possible to refinance without restarting your loan term at 30 years.

With a little bit of savvy, you can take advantage of today’s historic low mortgage rates and shorten the number of years remaining on your loan.

Here are several options to consider to refinance your mortgage without starting over.

Verify your refinance eligibility. Start here. (Dec 4th, 2021)

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Refinance without extending your loan

As a homeowner, your mortgage is your choice. There’s no rule that says you have to use a 30-year fixed-rate mortgage.

And if you do choose a 30-year mortgage, you’re not obligated to keep it the full term.

You’re free to refinance or use other strategies to shorten your repayment period — and save a lot on interest payments.

That said, lenders also won’t customize the term to suit the borrower. So you may not find a new mortgage with the same end date as your prior mortgage.

For example, let’s say you locked in a 30-year loan that is now 5 ½ years old and you’d like to refinance for a better rate. You can’t get a new loan for 24 ½ years to line up with your original 30 year loan. Due to this fact, you’ll either have to extend your loan term or switch to a new, shorter term when you refinance.

Luckily, there are plenty of loan terms available under 30 years, so it’s usually possible to refinance without starting completely over.

Refinance to a shorter loan term

The most straightforward approach is refinancing your mortgage into a shorter loan term and thus speeding up amoritization.

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.

For example, say your current loan balance is $300,000.

  • Your current loan has a 30-year term and 4.0% interest rate
  • You refinance into a 15-year term with a 2.5% interest rate
  • Your monthly principal and interest payment goes from $1,432 to $2000
  • That’s an extra $568 per month
  • But you save $257,760 in total interest payments

Payments on a 10-, 15-, or 20-year mortgage are always higher than payments on a 30-year loan.

But today’s refinance rates are so low that payments for a shorter loan term have become much more affordable than in previous years.

So before you dismiss the idea of a refinance to a shorter term, check out what your payment would be at today’s rates and see if it makes sense for you.

Verify your refinance eligibility. Start here. (Dec 4th, 2021)

Prepay your mortgage instead of refinancing

For many homeowners, the higher monthly cost of a shorter loan term isn’t in the budget.

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.

For example:

  • If your mortgage payment is $1,750 per month;
  • And you send $2,000 to your lender each month instead;
  • You reduce the amount owed on your loan by $250 every month. This will cause your loan to reach its “end date” sooner.

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

The best option: “Refinance-to-prepay” on your mortgage

There’s a third way to reduce your mortgage interest and shorten your loan term. 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 (make extra payments) 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 this strategy:

  1. Refinance to a lower rate on your same mortgage program (e.g. 30-year fixed)
  2. This will result in a lower monthly payment
  3. Apply your entire monthly savings to your new loan monthly as “extra payment”
  4. 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 you’re 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.

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

  • Your current loan balance is $400,000
  • You refinance from the 75% mortgage rate you took two years ago, to a zero-closing cost 2.75% mortgage rate
  • After the refinance, your payment will be about $220 less per month

Simply take those $220 savings and send it to your lender each month along with your regular payment.

If you keep it up, your new 30-year loan will pay off in 25 years.

This is 3 years faster than if you hadn’t refinanced at all (since you were already two years into your loan term).

And those five years of making “no payments” save you about $54,000 in interest.

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

Verify your refinance eligibility. Start here. (Dec 4th, 2021)

In need of funds: Cash-out refinance

It’s not secret real estate prices have been going up.

If you want to tap into the home equity you’ve accumulated in recent years to fund a remodel or to pay off high APR credit card debt, then a cash-out refinance mortgage may be a good option to pursue.

A cash-out refinance replaces your current home loan with a larger one, giving you the excess cash to complete your objective.

Depending on how much interest rates have changed since your prior mortgage, a cash-out refinance may not necessarily add to your monthly mortgage payments.

Understanding your mortgage repayment schedule

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.

Amortization is the payment schedule by which your loan balance goes from its starting balance to $0 over time.

The size of your principal and interest portions change each month based on this schedule. And unfortunately, amortization always favors the bank.

That means the early years of a loan require large interest payments, and include very little loan payback.

Only once you’ve held the loan a substantial amount of time do you start paying more toward your balance each month than toward interest.

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For example: 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 $119,000 remaining, or 40% 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 $235,000 remaining, or 78% of the original loan

With the 15-year home loan, your loan is more than halfway paid. With the 30-year mortgage, you’ve barely made a dent.

This is one of the reasons why homeowners are increasingly favoring 15-year refinances over 30-year ones.

Thankfully, today’s rates are low enough to make 15-year mortgages accessible for many homeowners who couldn’t afford them before.

And, even if a refinance doesn’t make sense for you, you can take your amortization schedule into your own hands by prepaying on your mortgage. This cuts down on your loan term and can lead to big interest savings in the long run.

Today’s refinance rates

Refinance rates are at historic lows.

There are millions of U.S. homeowners with mortgages “in the money.” If you refinance, you may be able to do it without extending your loan. And you could save yourself tens of thousands in the long run.

Check today’s rates to see what you could save.

Verify your new rate (Dec 4th, 2021)