How to Refinance Without Resetting the 30-Year Clock

Refinancing your home loan can be a great way to reduce your monthly payments when interest rates drop.

But if you’ve already spent several years paying your mortgage, you might not want to start your new loan back at square one. Luckily, you can refinance without making it a 30-year term loan.

Does Refinancing Restart Your Loan Term?

Yes, in most cases, the 30-year clock restarts when you refinance – but it doesn’t necessarily need to. Refinancing involves applying for and closing on an entirely new loan. Most mortgages are 30-year ones.

Being the standard mortgage, many refinancing homeowners – especially those doing so for the first time – don’t consider the repayment extension.

But getting a 30-year refinance is just one of many options. Mortgage companies commonly offer shorter loans in five-year intervals, such as 15-year, 20-year, and 25-year mortgages. Conventional guidelines even allow for terms as short as ten years. If you refinance into a new loan with a different term length, you could lower the number of years you need to repay your loan.

Can You Refinance and Keep the Same Term?

Finding a lender willing to let you customize your term may be possible. Under this arrangement, your new mortgage could even match the remaining payments on your current loan.

However, not all mortgage lenders will be this flexible with their term options. If the lender you’re working with offers a great deal on your refinance but can’t match your current term exactly, consider selecting the loan most in line with your anticipated payoff.

For Example: You have 26 years remaining on your mortgage, but the closest your refinance lender offers is a 25-year term. Assuming a $250,000 mortgage at a 6.75% interest rate, the monthly principal and interest (P&I) payment on a 26-year loan would be $1,702. Refinancing to a slightly shorter 25-year mortgage would only increase P&I payments by $25 monthly to $1,727.

$250k Loan @ 6.75% Interest*	Monthly P&I Payment
25-Year Term	$1,727
26-Year Term	$1,702

*All mentioned interest rates are for example purposes only and may not be available.

Similarly, someone with 19 years of payments left might choose a 20-year mortgage instead of a 15-year one. The latter, however, would have their loan paid off 25% faster.

Assuming a $250,000 mortgage with a 6.5% interest rate, the monthly principal and interest payment on a 19-year loan would be $1,912. Adding a year with a 20-year mortgage would reduce costs to $1,864 while moving to a 15-year term would result in P&I payments of $2,178

$250k Loan @ 6.5% Interest	Monthly P&I Payment
15-Year Term	$2,178
19-Year Term	$1,912
20-Year Term	$1,864

How Your Loan Term Affects Lifetime Interest Costs

A shorter loan term may increase your bills, but it will save you big in the long run. That’s because adding extra years to your repayment schedule can cost you significantly more interest over the life of your loan.

Here’s a quick look at the principal and interest payments on a $300k fixed-rate mortgage financed at 7% for various loan lengths, along with the total lifetime interest you would pay with each term. 

Keep in mind that shorter loans generally have lower interest rates. While we’ve used a constant figure to avoid confusion, the savings of a shorter mortgage are likely to be even greater.

Term	Monthly P&I Payment	Total Lifetime Interest
10-Year	$3,483	$117,991
15-Year	$2,696	$185,367
20-Year	$2,326	$258,215
25-Year	$2,120	$336,101
30-Year	$1,996	$418,527
35-Year*	$1,916	$504,959
40-Year*	$1,864	$594,861

*Conventional guidelines limit mortgages to 30 years. However, some non-QM lenders may offer loans with up to 40-year terms.

Advantages of Choosing a Shorter Mortgage Term

If you can comfortably afford a shorter-term mortgage, it’s usually a good decision. Some of the advantages to keeping your current repayment schedule, or switching to a shorter one, include:

Paying Off Your Loan Sooner

The most obvious advantage of having a shorter mortgage term is that you’ll pay off your loan sooner. Whether you’re early in your career or planning for the switch to a fixed retirement income, being mortgage-free can cushion your budget and relieve you from the costliest monthly expense that most Americans face. 

Interest Rates Are Usually Lower

Shorter loan terms are less risky for lenders. As a result, a borrower will typically qualify for lower interest rates on loans with faster repayment. In some cases, this difference may be minimal. Other times, you could see anywhere from a 0.5% to 1.0% or even greater savings by opting for a term shorter than 30 years.

Less of Your Payment Is Going to Interest

With a shorter term, a higher percentage of your payment gets applied to your principal balance—meaning you’re paying less to your lender as interest and paying off more of your actual house, which builds equity. As we demonstrated above, your mortgage term can significantly impact your total interest pay.

Private Mortgage Insurance Can Be Cheaper

When you do a conventional refinance with less than 20% equity, you are required to pay for private mortgage insurance (PMI). Costs vary by several factors, but rates are generally cheaper with shorter-term loans. Typically, mortgage insurance companies offer lower costs for loans of 20 years or fewer.

You’ll Eliminate PMI Faster

If you are still paying for private mortgage insurance, having a shorter mortgage will help you reach 20% equity faster. Depending on your premium, this could alleviate a considerable portion of the financial burden added by selecting a more compact term.

Disadvantages of Choosing a Shorter Mortgage Term

Are you confident you want to refinance your loan to the same length or shorter term? There are still disadvantages that you should consider. These limitations won’t affect everyone, but it’s important to be aware of the drawbacks before you secure your refinance loan.

Monthly Mortgage Payments Will Be Higher

Yes, you may save on interest, but repaying your principal sooner will almost always require larger monthly mortgage payments. Depending on the loan lengths you’re looking at and their associated interest rates, there could be a considerable difference in monthly costs.

Less Flexibility If You Hit a Financial Snag

Because payments are higher, you have less flexibility in your budget if you hit a financial snag. Few people plan to run into budget troubles, and having a longer term with lower payments can offer leeway if problems do arise.

Harder to Qualify For 

Since shorter-term loans have higher monthly costs, it may be more difficult for some borrowers to qualify for a mortgage. You would need a higher income level or fewer other debts to be eligible for a 15-year loan compared to a 30-year one.

Reasons to Refinance Back Into a 30-Year Loan

There’s no denying the benefits of refinancing to a shorter loan term. However, as with most personal finance topics, no single decision is right for everyone. Some homeowners may find it more sensible to use their refinance to reset the 30-year clock.

More Affordable Payments

Your payments will be lower since you’re amortizing your debt over a longer period. This can be beneficial if unexpected emergencies arise or if you anticipate a major life event, such as growing your family or transitioning into self-employment.

Easier to Qualify

If your finances have worsened since you took out your current mortgage, it may be more difficult for you to qualify for a shorter loan term – even one that matches your current repayment schedule. 

A 15-year mortgage with higher payments will have a greater impact on your debt-to-income (DTI) ratio than a more affordable 30-year loan. Higher DTIs equate to higher interest rates, and lenders won’t be willing to approve borrowers with ratios above a certain threshold.

You Can Pay Down Your Principal With a Lower Minimum Payment to Fall Back On

Most lenders will allow you to make extra payments to reduce your principal balance sooner. You can even match what your payments would be on a shorter loan term. This way, however, you aren’t locked into higher payments if you need to use the funds for other purposes.

For example, if you’re refinancing a $400,000 loan with 22 years left, maintaining that term at an interest rate of 6.5% would result in monthly P&I payments of around $2,850. Refinancing to a term of 30 years would have a slightly higher rate, 7% in this sample scenario, but would result in monthly payments of $2,660.

This is nearly $200 less per month than with a 22-year term. In this situation, you could lock yourself into the lower payments but still have the option to pay the larger monthly amount to help reduce your principal sooner. Then, if you need to make lower payments for an emergency, you can fall back on the lower required payment and hold off on paying the principal. Essentially, this route gives you more options at the cost of a slightly higher interest rate.

Refinance Without Resetting the Clock – But Should You?

While most borrowers end up with another 30-year loan, it’s possible to refinance without resetting the clock. 

There’s no single answer to determine if extending your loan term is the right financial decision for you.To get a more personalized look at your refinance options, including how different loan lengths could impact your housing costs and payoff date, check out today’s rates and get in touch with a lender serving your community.