Does Refinancing Reset Your Loan Term?

How Does Refinancing a Loan Affect the Loan Term?

When you refinance, your existing loan is replaced with a new one that has a new repayment term, which starts when you close on the loan. Term options vary based on the type of loan you're refinancing, the lender, the loan amount and your creditworthiness and may be shorter or longer than the term on your original loan.

When selecting a repayment term, consider how it will affect your monthly payment, the total cost of the loan and your payoff date. Opting for a shorter term could help you qualify for a lower rate, reduce your total interest charges and allow you to repay your debt faster. That will reduce the total cost of your loan, but it could lead to a higher monthly payment.

Refinancing into a longer-term loan can provide relief each month if you need some wiggle room in your budget. But your total interest charges will be higher, and your payoff date will get pushed out, potentially affecting your ability to save and invest for the long term.

Compare mortgage refinance rates

Check today’s refinance offers and current rates to find the right loan to lower payments or shorten your term.

Is it Possible to Refinance Without Restarting Your Loan Term?

Because you get a new loan, refinancing restarts your loan term at closing. But that doesn't necessarily mean you have to extend your repayment timeline.

Example: You have a $400,000 mortgage with a 30-year term, an interest rate of 6.5% and a payoff date of 2041. You're 15 years into the term when rates drop to 5%. Refinancing into another 30-year loan would save you $970 per month, but it would also push your payoff date to 2056.

If you don't want to extend your repayment timeline, however, you don't have to. Instead of refinancing to a 30-year mortgage like in the above example, you can refinance to a 15-year mortgage and save about $233 per month. With this option, you'll land a lower monthly payment but your repayment timeline will stay roughly the same.

Before selecting a term for your new loan, compare the interest rates, monthly payments, total interest charges and payoff dates of multiple options. Choosing a repayment term that fits comfortably into your budget with a payoff date that aligns with your financial goals is essential for maintaining short- and long-term financial health.

When Does it Make Sense to Refinance a Loan?

Refinancing isn't always a good option, but it's usually worth considering in the following scenarios.

• You can get a lower interest rate. Whether market rates have dropped or your credit has improved since you got your original loan, refinancing into a loan with a lower rate will decrease your total interest charges. Qualifying for a lower rate may even reduce your monthly payments without extending your repayment term if the difference between the rates on your new and original loans is big enough.
• You want to shorten the term. Shortening your loan term reduces total interest charges and helps you pay off your loan faster. Refinancing into a shorter term can (but not always) increase your monthly payment, depending on the interest rate you qualify for. Compare the new estimated monthly payment with your current payment before refinancing to ensure you don't stretch yourself too thin. If rates have dropped since you got your original loan, your payment may not increase significantly.
• You want to lock in a fixed rate. Variable interest rates result in fluctuating monthly payments that can make budgeting difficult. Refinancing from a variable-rate loan to a fixed-rate loan gives you predictable monthly payments that make it easier to budget.
• You want to remove a cosigner. If you have a cosigner who no longer wants to be financially responsible for your loan payments, refinancing will remove them from the loan.
• There's no prepayment penalty. Some lenders charge prepayment penalties when you pay off your loan early. Before refinancing, make sure your lender doesn't charge one. If they do, compare the early payoff fee with the amount you can save by refinancing to determine whether the math works in your favor.

Tip: Refinancing may come with closing costs and other fees, depending on the type of loan you're refinancing. Compare the total cost of the new loan with the original to determine whether it makes sense to replace your existing loan.

How Does Refinancing Affect Your Credit?

Refinancing can affect your credit scores in a few ways.

• You're closing an old account and opening a new one. The length of your credit history, which includes the average age of all your accounts plus the age of the oldest and newest, plays a role in your credit scores. Closing old accounts and opening new ones can hurt your scores because it decreases the accounts' average age. But length of credit history is less important than other factors, such as your payment history. Making your loan payments on time can help offset age-related scoring factors.
• It may affect your credit utilization. Refinancing or consolidating revolving credit card debt into an installment loan can lower your credit utilization rate, which may improve your credit scores as long as you don't run up balances on the cards you just paid off. Keeping your utilization rate under 10% is best for your credit scores.
• The lender will check your credit. When you apply for a new loan, the creditor will conduct a hard credit inquiry to review your credit history. This may reduce your credit scores slightly, but the impact is typically small and temporary.

Prepare Your Credit for Refinancing

Whatever your motivation for refinancing, having good credit can be important when you want to get approved for a new loan. You can check your Experian credit report and FICO^® Score^Θ for free, and get insight into what's hurting and helping your score. Then focus on improving your score to help you get the best offer when refinancing a loan.