This Is Suze Orman's Rule for Refinancing

Orman says it's all about picking the terms of your new loan.

Refinancing your mortgage often makes paying your mortgage less expensive. However, in order for refinancing to make financial sense for you, be sure your new loan is right for your needs.

To help you make the right choices about your refinance loan, personal finance guru Suze Orman has a simple rule she advises everyone to follow.

Suze Orman's rule relates to choosing a new loan

On her blog, Suze Orman says when it comes to refinancing, "never extend your total payback period past 30 years."

This rule is important to be aware of, because people often don't refinance a loan within the first year or two of getting a mortgage. Instead, many refinance after they've made payments on their loans for a while.

When you go through the refinance process, you apply for an entirely new loan. You choose how long you want the repayment period on your refinance loan to be. Most commonly, you choose between a 15-, 20-, or 30-year refinance loan.

If you follow Orman's rule, when you pick your new loan term, you make sure the total repayment time for your mortgage doesn't exceed 30 years -- and that includes the time paying the new loan and the time paying your existing loan.

If you've made payments on your mortgage for 12 years and choose a 30-year refinance loan, you'd pay your mortgage off over a total of 42 years. To follow Orman's advice, you'd choose a 15-year loan. Then, when the new loan is combined with your old loan, you'd make mortgage payments for a total of 27 years.

A prolonged loan term can cost you

Orman advises this because otherwise a refinance loan can cost you money -- even if you reduce your interest rate. Following this rule helps ensure that when you get a new loan, you don't spend extra time paying interest to the bank.

"Otherwise, even with the lower interest rate on the new loan, chances are high that your total interest payments over the life of both loans will be more than the interest if you just stuck with your current mortgage and paid it off in 30 years," Orman says.

A loan with a longer payoff time may seem attractive when you compare rates because your monthly payments would be lower than they are on your current loan, but Orman believes you need to look at the big picture. Much lower monthly payments aren't a good thing if they mean you devote more money and time to loan payback and it takes you longer to own your home free and clear.