- - Thursday, December 22, 2011

Q. I have read your columns and how you recommend that refinancing with zero costs - more than once - is a good thing. I think your advice is bad because every time a homeowner refinances, he stretches his loan out another 30 years.

If everyone took your advice, a mortgage loan would never get paid off. Can you explain yourself?

A. I can, I have before and I will again. You are correct that a refinance gives the borrower another 30-year term, assuming he refinances to a 30-year loan. But I have said many times that a mortgage loan can be amortized over a shorter period than what is dictated on the promissory note.

The drop in monthly payments as a result of a refinance is a function of two things. First, presumably, the interest rate is being lowered. Second, the borrower is beginning a new 30-year term and therefore is spreading out his loan over a longer period.

It is for this reason that I always give a borrower a true apples-to-apples comparison. Here’s an example:

A borrower called me to inquire about refinancing. He has a balance of $364,058 on a 30-year fixed-rate loan at 5.25 percent. He is 34 months into the 30-year loan, and his monthly principal and interest (P&I) payment is $2,098.

I quoted him a new 30-year fixed rate of 4.25 percent with no points or closing costs. The new P&I drops by $307, to $1,791. But as you aptly point out, making this payment adds an additional 34 months to the original loan period.

I told my client that if reducing the monthly payment is the biggest priority, it’s important to know that his loan term is being extended. However, I also told him that he can make a P&I payment of $1,884, which is still $213 less than his current payment, and the new loan would be paid off in 326 months - the number of months remaining on his existing loan.

So I respectfully stand by my advice. If a homeowner can refinance with no fees out of pocket and no fees added to the loan amount, multiple refinances make sense as long as the borrower is lowering his rate and understands he has the option to make additional monthly principal payments that will shorten the term.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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