Don't extend your mortgage during refinancing

Dollar bills shaped like a house

You might be tempted to reduce your monthly mortgage payment by extending the life of your loan during a refinancing, but it's only going to keep you in debt longer and increase the overall cost of your home loan.

Our mortgage calculator will show you it doesn't often make financial sense.

Say you took out a 30-year mortgage for $200,000 five years ago at a 6.5% interest rate.

The $1,264 a month in principal and interest you've paid has reduced your debt to roughly $187,000.

If you refinance now at 5%, you'd pay:

Yes, you save about $230 a month by extending your loan, but you'd pay about $65,000 more over the life of the now-longer loan. Rather than shaving five years off your existing 30-year loan, you'd be adding five years.

Now, if you invested that extra savings each month, you could in theory make the numbers work. But you'd have to invest in a high-yield -- and thus riskier -- product like the stock market.

If you invested that $230 each month and earned an annual interest rate of 8% (During the last 30 years, the average annual compounded rate of return for the S&P 500 was approximately 10.05%.) you could well outpace the cost of extending your loan.

By the 30th year, you could have a nest egg of more than $320,000, which could easy justify the extra $65,000 in mortgage interest payments.

The problem is that very few people have the discipline needed to invest monthly mortgage payment savings -- and there's no guarantee you would actually make that much money by investing.

Follow on Twitter.

Leave a Reply

Your email address will not be published. Required fields are marked *