How I Make Sure Refinancing My Mortgage Doesn't Cost Me Money

Refinancing doesn't have to cost more. 

I have refinanced my mortgage loan several times since becoming a homeowner over a decade ago. There have been various reasons for refinancing, including changing from an adjustable-rate mortgage (ARM) to a fixed-rate loan and reducing my interest rate. 

Each time I've refinanced, I've made sure the loan won't cost me money in the end by doing one simple thing. 

This is crucial to consider when refinancing a mortgage

To make sure that my new mortgage loan would never end up costing me more, I've made certain to avoid taking out a new loan that would significantly increase my repayment timeline.

See, the total cost of a mortgage loan is determined by two things: the interest rate you pay, and the length of time you pay interest. And for many people who refinance, the focus is on the interest rate alone. 

It definitely makes sense to look for the lowest rate possible when securing a new home loan to pay off your old one. And you want to make sure the rate on the new loan is lower than what you were currently paying. Otherwise, refinancing typically is not the right move. 

But just because you reduce your rate does not necessarily mean you will lower your total repayment costs. The problem comes if you've been paying on your home loan for a while, and then you take out a new loan with a longer payoff period. 

Say, for example, you had been working on paying your 30-year loan off and you were eight years in. You'd have 22 years of payments left -- but if you refinanced to a new 30-year loan, you'd add an additional eight years of payments and so your loan might become more expensive over time than the one you had -- even though your interest rate and each monthly payment would be lower.

I didn't want to end up making my total borrowing costs more expensive in an effort to save money in the short term, so whenever I've refinanced, I've made sure to choose a new loan with the same or a shorter payoff time than on my existing home loan. 

This meant that I wouldn't save quite as much on my monthly payments, despite dropping my interest rate -- but I also wouldn't find myself owing interest for many more years and committing to make many extra years of payments.

Should you focus on payoff time when refinancing? 

If you are considering refinancing your mortgage, you definitely want to think about how long you have remaining on your current loan and avoid significantly increasing the time it will take you to become debt free.

If you don't do this, and you refinance several times in order to get a lower rate, you could end up making your house a lot more expensive in the end -- and you could also end up having a mortgage for basically your entire adult life and even into retirement since you'd keep resetting the clock on your payoff efforts.