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The Curious Bag
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<h4 class="dechead">On One Hand: Lower Payment and Interest Rate
When interest rates decline, many homeowners think about refinancing their mortgage to a lower rate, which generally results in a lower monthly payment. If your current mortgage payment is manageable, you can pay the same amount on the new loan. The extra will diminish the loan's principal, so you will pay off your mortgage sooner than planned.
On the Other: Longer Term, More Interest Paid, Less Tax Savings
Refinancing restructures the loan, which usually means you will be making payments for a longer time than if you had stayed with the original mortgage. This means you may end up paying more interest over the life of the loan, regardless of the rate. A lower rate also means you'll have less interest to deduct on your annual income tax return.
Bottom Line
Refinancing may save you money on monthly payments or on total interest if you pay extra toward the principal. You should carefully evaluate the new loan compared with the old loan to determine your long-term savings, if any. Don't forget to include closing costs, points, and loan origination fees in your calculations.
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