Does a refinance reset your 30-year clock?

The example

Assume you have 22 years left on your current loan. Your monthly payment is $2,478. You want a lower payment, so you consider refinancing into a new 30-year loan. On the new loan, your monthly payment would be $2,054.

The new payment is lower than the old one. That is the main reason people choose a new 30-year term. A lower payment leaves more cash each month for bills, savings, or emergencies.

The catch is the length. A new 30-year loan starts the clock again. You no longer have 22 years left. You have 30 years. You pay interest for more years, and that changes the total cost.

Your own numbers will differ. This example uses fixed facts so you can see the trade-off clearly.

A lower payment, but more total cost

A lower payment does not mean a lower total cost. To compare costs, look at the interest and fees over the life of each loan, not only the monthly payment.

Start with your current loan. If you keep it to its end, you pay $334,308 in interest from now on. That is the cost of staying with the loan you have.

Now look at the new loan. Over its life, it costs $419,520 in interest and fees. That is $85,212 more than the current loan. The lower payment is paid for with more years of interest. Interest is charged on the balance each month. Early in a long loan, much of each payment goes to interest. A new loan starts that early stage again, so the balance drops slowly at first.

After 10 years, the refinance still saves $10,255 compared with keeping the current loan. That saving is real. It is also small compared with the full-life difference. The 10-year number does not show the final result.

The answer depends on how long you keep the loan. Ask yourself a few questions:

• How long do you expect to keep this home?
• How long do you expect to keep this loan?
• Would the lower payment help your budget now?
• Would you pay the extra interest for the cash flow?

Check the saving at the time you expect to keep the loan. Do not decide on the monthly payment alone. The monthly saving is easy to see on a statement. The total cost is harder to see, so compare it on purpose.

Other options

You do not have to choose only between the two loans in this example. Other options exist. Each option changes a different part of the trade-off. Compare them side by side with your own numbers.

You can choose a shorter loan term, such as 20 or 15 years. A shorter term has a higher monthly payment than a 30-year term. It also has less interest over the life of the loan. You repay the balance faster, so more of each payment reduces what you owe. Check that your budget can handle the higher payment before you choose it. Lenders often quote a lower rate for a shorter term. Ask for quotes on both terms, then enter each one as a separate offer in the calculator.

You can keep paying your old payment amount on the new 30-year loan. The extra money goes toward the balance each month. The loan then ends sooner than its full term. This option keeps your monthly cash flow close to today. Check the loan terms first to confirm that extra payments are allowed without a fee.

The calculator does not model extra payments yet. You can compare a new loan term and payment today. You cannot yet enter extra payments to see their effect on the total cost.

Want to see your own numbers? Open the calculator. Your numbers stay in your browser.