The beginning of 2009 has brought an increase in mortgage refinances as rates drop and homeowners want to rid themselves of adjustable rate mortgages.Lower rates may mean that this is a good time to refinance, but lower monthly payments don't always translate into more savings.
When a homeowner begins making payments on a mortgage, typically those payments initially go toward interest and subsequent payments are put toward the principle. As a result, taking out a new loan could translate into more interest.
"Even though your monthly payment is lower, you might be paying more interest over the life of the new loan than you've got left to pay on your old mortgage," Mike Dubis, a Certified Financial Planner tells CNBC here. "Besides that, if you take out another 30-year mortgage, you might be still paying that thing when you're retired. Consider how much interest you'll be paying with a new loan in total, compared to what you've already paid with your old loan.”
One option homeowners have is to take out a mortgage with a shorter term because they tend to come with lower interest rates. For example, last week’s fixed rates were 5.10 percent for a 30-year fixed mortgage and 4.73 percent for 15 years.
Over the course of 30 years, those tenths of a point could add up significantly. In addition, some lenders allow homeowners to take out loans that match the length of their previous mortgages to make refinancing easier.
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--Bridget O'Sullivan
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