Mind the Term in Rate-and-Term
The formula above doesn’t measure your total savings over the life of the new mortgage. A refinance can cost more money in the long run if you start your new loan with a 30-year term.
Kris has been paying $998 a month for 10 years. If Kris doesn’t refinance, the payments will total $239,520 over the next 20 years.
With a refinance, Kris could pay $697 a month to repay the new loan in 30 years, or $885 a month to pay it off in 20 years.
$697 x 360 months = $250,920
$885 x 240 months = $212,400
In the example above, Kris borrowed $186,000 at 5 percent. 10 years later, Kris had a remaining balance of $146,000, and refinanced at 4 percent.
Use Bankrate’s mortgage calculator to compare your own loan scenarios:
- See what happens when you input different mortgage terms (in years or months).
- Reveal the amortization schedule to see how much total interest you would pay.
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NICOLE FORNABAIO/RD.COM, SHUTTERSTOCK
Pros and Cons of Cash-Out Refinances
Cash-out refinances often are used to pay down debt. They have pros and cons.
Imagine that you use a cash-out refinance to pay off credit card debt. On the pro side, you’re reducing the interest rate on the credit card debt. On the con side, you may pay thousands more in interest because you’re taking up to 30 years to pay off the balance you transferred from your credit cards to your mortgage.
But the biggest risk in this scenario is in converting an unsecured debt into a secured debt. Miss your credit card payments, and you get nasty calls from debt collectors and a lower credit score.
Miss mortgage payments, and you can lose your home to foreclosure. Home equity debt that’s added to the refinanced mortgage always was secured debt. See what else you need to know about down payments.