Determining whether refinancing your mortgage is worthwhile can be a daunting task. For a refinance that has closing costs, you may be advised to simply take the total closing cost and divide that number by amount saved per month to determine the number of months until the “break even” point. With zero-closing-cost refinances you sometimes hear that since there are no upfront costs, there is nothing to lose, and that you can refinance again and again at zero cost if rates drop further.

However, any complete analysis of a refinancing scenario should also take into account the not-so-obvious cost of restarting a mortgage from the beginning–a cost that many lenders do not readily point out. Refinancing restarts the clock on a mortgage, possibly resulting in years of additional payments. Even though the interest rate may be lower and the payments reduced, resetting your mortgage to a term longer than the remaining time on your existing mortgage could cost you thousands in additional interest over the life of the new loan.

Take for example, a loan of $200,000, for 30 years, at 6%. Let’s look at refinancing that loan after 5 years. Here are the stats on that loan at the 5-year mark.

Current monthly payment: $1,199.10

Remaining Balance.: 185,840

Remaining Interest (if the loan is continued until completion): 172,692

Here are three scenarios for refinancing the remaining balance of $185,840.

New New New Total Savings Terms Payment Interest (or loss) ——————————————- 30y 5.0% | 997.63 173,306 (614) 30y 4.0% | 887.23 133,562 39,130 25y 5.0% | 1,086.40 140,081 32,611

Note that in the 30-year, 5% case, even though the interest rate is a percentage point lower, and the new payment is about $200 less, the total interest on the new loan would actually be greater than the remaining interest on the original loan. This scenario would realize a $614 loss in interest. That is due to the loan being restarted to 30 years, resulting in five more years of payments. In this example, realizing a savings on a 30-year refinance requires dropping the rate by more than 1 percent. At 4%, the savings is significant, at $39,130.

Alternatively, refinancing to a loan with the same duration as the remaining time on the original loan (25 years in this example) does realize a significant savings, even with the 1 percentage point drop. In general, refinancing to a duration that is the same or less than the time remaining on the original loan will realize some interest savings, regardless of rate drop.

The further along you are in the old loan when you decide to refinance, the worse it gets. Consider the same original loan used above, but instead refinanced after 10 years. Here are the numbers for that case.

Current monthly payment: $1,199.10

Remaining Balance: 167,009

Remaining Interest: 119,577

Some scenarios for refinancing the remaining balance after 10 years:

New New New Total Savings Terms Payment Interest (or loss) ——————————————- 30y 5.0% | 896.54 155,746 (36,169) 30y 4.0% | 797.33 120,028 (451) 20y 5.0% | 1,102.19 97,515 22,062

In this case, you can see that you would need to drop the 30-year rate more than 2 percentage points–to under 4%–to see any savings in total interest paid. And again, refinancing for the 20 years of remaining time on the loan saves interest with only a 1 percent drop, though the monthly payment is reduced less.

Of course, all of the above assumes that you would stay in your house for the full term of the refinanced loan, and that you would not be making any extra principle payments. A change in either of those factors would mean a reduction in the total interest paid.

To perform the analysis above, you’ll need a financial calculator that shows you the remaining interest on your loan, such as the refinance calculator at www.interest.com (see www.interest.com/content/calculators/recoup.asp). With that calculator, you can enter the numbers for the old and new loans, and it will show you whether you’ll realize an interest savings or loss. It also generates a table showing you how much interest you’ll pay during each year for both the old and new loans. That way, if you plan to move in X number of years, you can do a comparison of the total interest you would pay for X years on the new loan verses X more years on the old loan.

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