*Question by Spike*: Question about Refinancing your Mortgage…?

As I see it Refinancing your mortgage is pretty much lowering your monthly payment so you can have more cash back in your pocket every month. But what I found out is every time you Refinance you have to start paying for the house all over again, but with a lower monthly payment. Not to be a jerk or anything, but why the hell would you do that? I can’t see anything positive from doing that first of all because you actually LOSE money.. and second if your going to do that why did you buy a house that expensive in the first place? Just my point of view. If someone can give me a reason to not hate Refinancing your mortgage please tell me. I’d like to know both point of views. 😀

**Best answer:**

*Answer by Peter B*

Refinancing does not necessarily lower your payments.

When one first takes out a mortgage, it’s amortised (calculated) over a certain period – it used to be 25 years, but nowadays, I’ve seen them at 30, 35 and 40 years. I’ve also seen the period being 15 or 20 years. The calculation involves an interest rate, which is used to calculate a payment that will cover the interest and pay back the principle (the amount actually borrowed) in that time period.

So,each payment you make is part interest (you pay them for the use of their money) and part principle. As each payment goes in, the actual amount you owe goes down.

Refinancing happens because most of these loans are NOT for the full period, but for a shorter time,like 5 years. The reason for this is that interest rates go up and down, and the lender wants to make as much as possible. Anyways,when you refinance,you do so for the amount of principle you still owe (a lower amount than what you started with). You can borrow more (if the house value has gone up), but usually you just take enough to cover what you owe. So, you still have the house paid off in the time used in the calculation at the start.

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Granted, not everyone is smart. People who keep refinancing with another 30 year mortgage just to get a lower monthly payment, may not realize what extending their loan costs them over the long run in more total interest. But there are cases where refinancing can make sense, if you get a lower interest rate and shorten the terms enough to pay less total interest, even if monthly payments are slightly higher.

In my case interest rates had not come down yet when I bought my home in 2002 with a 7% 30 year mortgage. 3 years later I refinanced for 20 years at a lower fixed interest rate, knocking 7 years off of my payments, saving $ 62,000 in interest, for $ 30 “additional” monthly payment. I also eliminated tax escrow and they gave me a free variable rate HELOC to borrow back paid principal if I need it (currently 3.75% APR). Grand total closing costs $ 170.00. Of course that was early 2005 when my lender’s own branches were competing with each other to refi my existing loan with them.

the reason that many peoiple do this is because of the lower interest rate. i’ll use an example. say i bought a home in 2006, for 250k. in 2009 i refinance. in 2006, my interest rate is 6.7%. in 2009, i achieve a rate of 5.3%. that being said, even though the 30 year period is starting again in 2009, i’m still paying less than i would have paying 27 years at 6.7%. never undestimate the interest rate. it can make a HUGE difference.

that being said, there are caveats here. because of things in the mortgage industry, refinances are much more stringent than they once were. however, if you run the numbers, somtimes a refinance can make a lot of sense.

Not always the case.

I refinanced a 30 year mortgage with a high interest rate to a 15 year mortgage with a lower interest rate. I pay the same amount each month…but will pay much less interest, plus my home will be paid off much sooner.