Testing a refinance against time: breakeven, term resets and total cost
Test 2: the term reset
On the bench
Refinancing usually starts a new term. If you have been paying for years and restart a long term, the payment can drop even though you will make many more payments overall. Compare the payment times the months left on your current loan with the new payment times the new term, plus closing costs. If the new total is higher, the savings come from stretching the loan, not from a better deal.
Last reviewed against the primary sources listed below.
Ways to avoid stretching
- Choose a shorter new term.
- Keep paying the old payment amount on the new loan, if there is no prepayment penalty.
- Compare both totals before deciding.
Breakeven questions
Is it bad to restart a 30-year term?
Not always, but compare total remaining payments so you know what the lower payment costs over time.