Remortgages- Bad Idea to Let the Bank Decide the Term

It seems people don't think they have any say in the remortgage process beyond accepting or not accepting the rate. They let the lender decide the term. That's a bad idea that has really big consequences.

The lender (or the mortgage broker) usually suggests 30-year amortization on home loans. Sometimes they also suggest 15. They never suggest that you remortgage so that you stay within the 30 year term of the original


mortgage. I'm sure a lot of them don't even think about anything else except 30 and 15 years. Maybe because they are so prevalent.

Here are 2 examples that show you the difference between remortgaging the usual way and remortgaging the way that benefits you the most.

Remortgaging, 30-Year Term Each Time

A home owner and her husband, let's call them Jack and Jill, buy a 3-bedroom house for $375,000. They take a $300,000 mortgage loan at 7% amortized over 30 years to do so. Their closing costs are $3,000 and they roll them into the mortgage. So they end up owing the bank $303,000.

After 3 years, they remortgage. Their new loan is amortized over 30 years, at 6%. They do not roll the closing costs into the loan, do not take cash out. After 4 years in the 2nd loan, they remortgage again. This time at 5%. Again the loan is amortized over 30 years and they don't take cash out or roll the closing costs into the loan.

The original loan has monthly payments of $2,015.87. In 3 years Jack and Jill end up paying $72,571 and reducing their principal to $293.387.

The 1st remortgaging has monthly payments of $1,759, reduces the principal to $183,035. Four years of payments (totaling $84,432) whittle down the principal to $277,956. The 2nd remortgaging comes with monthly payments to $1492. It takes the principal to $0.00. 360 monthly payments add up to $535,680.

If Jack and Jill had not refinanced, their $303,000 home loan would have taken $723,709 to pay off. Refinancing it the way he did cost him $692,683.

On the good side, Jack and Jill reduced their payments by $524; the total amount they paid over the life of the loan by $31,025. On the bad side, they spent a lot more money than they had to, over $90,000 more by the time they were done making the last payment.

Remortgaging - 30 Years Total

Jake and Jill take out the first home mortgage loan for 30 years. They remortgage after 3 years but the loan is amortized over 27 years. They remortgage again after 4 years but the loan is amortized over 23 years.

The first loan has a monthly payment of $2,015.87 and in 3 years Jack and Jill end up paying $72,571 and reducing the principal to $293.387, just like in the first scenario (obviously).

The 1st time they remortgage, they reduce his payments to $1,831. And in 4 years they get the principal down to $274,168 by paying a total of $69,566.

The 2nd time they remortgaging, they reduce the principal to $0.00, like in the first scenario, but they have to pay only $460,230 to do so (the monthly payments are $1,674).

With this scenario, Jack and Jill own the house 7 years sooner, reduce their monthly payments by $342, BUT they save $90,315 over refinancing as in scenario number 1 and $121,341 vs not refinancing at all. (This way, they total amount they spent only $602,367).

The later in the life of a home loan you remortgage, the worse off you are if accept a 30-year loan again. The higher the interest rate, the worse off you are if accept a 30-year loan again. The larger the amount you borrow, the worse off you are if accept a 30-year loan again.

In conclusion, it's a good idea to remortgage (refinance). It's a bad idea to remortgage with 30-year terms if you can avoid it.