SmartMoney Blogs

Real-Time Advice
Our real-time advice on how market shifts and news impact you and your money

5 Pitfalls of Home Refinancing

Refinancing means starting from scratch

Getty Images


When homeowners sign up for a 30-year mortgage, the monthly payments made during the first seven years will pay down about 5% of their principal, with the rest going toward interest, says Lattas. Instead of making a dent in their principal, homeowners who refinance after the seven-year mark effectively start the payment process all over again.

Refinancing could also set them back over the longer term, says Stuart Feldstein, president at SMR Research, which tracks mortgages. A homeowner five years into a $200,000 mortgage at a 5.5% interest rate, for instance, might decide to refinance to a 4% rate. Fifteen years after refinancing, the homeowner will owe around $145,000, meaning they built up equity of roughly $55,000 in the home. If they hadn’t refinanced and kept their original mortgage, they’d owe about $139,000 and have equity of $61,000. In other words, unless borrowers need to lower their monthly payment in order to be able to hold onto their home, they might want to reconsider refinancing, says Feldstein.

«»

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (0)

    • Be the first to leave a comment on this blog.

About Real-Time Advice

  • How breaking news — in the markets, Washington, and around the world — affects you and your money. Have a question about how current events may change your financial future? Email us at ask@smartmoney.com.