Thinking about refinancing your 30-year mortgage?

How many times have we explored this option? All those solicitors, yikes! All those deals soliciting you to refinance your mortgage at today’s low interest rates may sound great, but when you really dig into the numbers, that’s often not the case. Here’s why…….

“Consolidate your credit card debt into one low monthly payment!” “Refinance and take advantage of today’s low rates!”

Homeowners are constantly bombarded with refinance and debt consolidation offers because it’s a great deal for lenders. In most cases, it’s a very costly deal for homeowners.

The real cost of credit is much greater than most people realize. According to if you’re carrying $2,000 of debt on a credit card at 18 percent (and some cards are as high as 28 percent,) it will take you 370 months (nearly 31 years) to pay off that debt. In addition to the $2,000 of charges you made, the amount of interest you will pay is $4,931. Does it really make sense to be paying for your Starbucks and pizza for over 30 years?

Refinancing and consolidating credit card debt can be a smart idea, but …

When homeowners need money to remodel their home, to pay off credit card debt, or to use for unexpected medical bills, it’s tempting to borrow against the equity in their home. The question is whether it’s smart to refinance your existing first mortgage to do so. In almost all cases, the answer is “no!”

Why lenders love it when you refinance your first mortgage

Did you know that during the first 10 years of a 30-year fully amortized mortgage, that you pay close to 50 percent of the entire interest due on the loan? If you go ahead and refinance your mortgage, you’re going to be going through that whole process again — this is why refinancing your mortgage is a better deal for lenders than for the borrowers.

A case study: How the numbers stack up

Assume that you purchased your current home in March 2010 for $250,000 and obtained a fully amortized 30-year $200,000 mortgage at five percent interest. The total interest due over the life of your loan is $186,512.

As of March 2020, you will have already paid $91,521 of the interest due on this loan — that’s 49 percent of the total interest in only 10 years!

Assume that you now need $37,000 to consolidate your credit card debt, and you have no plans to ever sell your home. Your choices are to:

  • Roll your current loan balance of $163,000 and the $37,000 you need to pay off your credit card debt into a $200,000 refinance at a lower interest rate.
  • Leave your existing $163,000 first mortgage in place and obtain a home equity loan for $37,000.

Option 1: Obtain a new 30-year, fully amortized loan of $200,000 at 3.5 percent interest and you stay in your home until March 2040 when the loan is paid in full.

  • Over the life of your new first mortgage, you will pay $123,312.18 in interest.
  • When you refinance your existing mortgage, you will have already paid $91,521 in interest on that loan.
  • Total interest paid: $214,833.

Option 2: Home equity loan 

  • You leave your existing mortgage in place and obtain a home equity loan of $37,000 at five percent, fully amortized for 10 years.
  • You will pay $10,093 in additional interest for the home equity loan.
  • You will have also paid $186,512 in total interest from your existing mortgage.
  • Total interest paid: $196,605.

Savings with the home equity loan vs. refinance of your current first mortgage: $18,228

You can play around the numbers to fit your own scenario using any online mortgage amortization schedule calculator, but you get the idea. Really dig into the numbers, think about when you might move in the future, how much that move might cost or save you, and then figure out what makes the most sense for you.

(There’s an excellent article from The Mortgage Reports that discusses other options besides home equity loans and compares the costs of those other options.)

Key takeaways

  • First and foremost, get your credit card spending under control. If you’re making minimum payments on your card each month, is that pair of shoes, pizza dinner, or other purchase worth paying up to five times what the cost of the item or service is?
  • Pay cash or use your debit card. Only use your credit cards for emergencies or if you have enough money to pay off your charges at the end of the month.
  • Avoid paying off your first mortgage unless you have a very compelling reason to do so. In most cases, it’s simply not worth it.
  • Because individual financial situations and creditworthiness vary dramatically, review your situation with a financial planner or CPA before deciding which options will work best for you.

A great deal of my material comes from Inman Headlines, National Association of Realtors, and Florida Association of Realtors.