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Low mortgage interest rates have made refinancing a good option for many homeowners who can sign up for a lower rate and even take cash out of their home equity while still lowering monthly payments.

But what if the homeowners already have a few years of equity built up in the home — should they take on a new, 30-year loan or refinance closer to their current loan term, such as 25, 20 or even 15 years?

By extending to a new, 30-year loan, the homeowners would pay even less per month, because the loan amount would be spread out over a greater number of years than the current loan — but they would also pay more overall due to interest being applied for a longer period.

We asked Forrest Baumhover — a financial planner in Tampa, Florida, and a member of NerdWallet’s Ask an Advisor network — about the key factors homeowners should consider when deciding whether they should refinance.

What are the advantages of refinancing to a new, 30-year loan instead of keeping the same term?

The advantages of refinancing to a 30-year loan include being able to lock in a low refinance rate for such a long time, while freeing up your money to work for you in long-term investments. Also, locking in your rates for 30 years acts as a hedge against inflation, ensuring that your mortgage payment stays the same, even as house prices and rents go up over time.

What are the disadvantages of this strategy?

One issue that people might consider a disadvantage is that you pay more interest over the cost of the loan. While that’s true, you could also argue that the financial flexibility is more than worth it. First, with the power of compounding interest, the money you’re able to invest by having a lower mortgage payment will earn more over the life of the loan than the additional mortgage interest will cost you. Also, you have available funds in case of an emergency.

One disadvantage is that some 30-year loans might have a higher interest rate, although you might find some loans where 15- and 30-year mortgage rates are similar.

Is there anything else homeowners should keep in mind about mortgages?

Homeowners or people looking to buy a home should keep in mind that looking at a mortgage as strictly a tax write-off is a bad approach. Toward the end of a mortgage, many people find that if their mortgage is their only itemized deduction, it may be less than the standard deduction, making it worthless. This is especially true in areas with low real estate taxes.

Forrest Baumhover is a fee-only financial planner and the principal of Westchase Financial Planning.

Published date on Jul. 25, 2018


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