When refinancing, it is easy to focus on the interest rate and monthly savings, completely forgetting that your loan term (years) will make an even bigger difference in the total amount you will pay for your house.

Key Principle: When paying a mortgage, your #1 enemy is not the interest rate. It is time.

Why is Time an Important Factor in a Mortgage Loan?

Spreading out your payments over 30 years is what causes you to pay 2.5 to 3 times more for your house than the purchase price. If you shorten that time to 20 years or to 15 years, you will save tens of thousands of dollars on the typical loan.

How This Principle Applies to Refinancing

If you’ve been paying on your mortgage for close to ten years and refinance into a 30-year loan, you go backwards by ten years and cost yourself a lot of cash, even if you lower your interest rate. Therefore, you must lower your rate by a very significant amount in order to come out ahead, because ten years’ interest gets you far into the amortization schedule.

If you’re ten years into your loan and you want to refinance into a lower rate, then look at taking a 20-year loan. That way, you get the lower rate without going backwards.

Even better, also look at the 15-year loan. The 15-year loan gives you an even lower interest rate and cuts even more years off your loan. You come out ahead in every way! The only caveat is that you must be able to afford the payment.

Be careful not to take a payment you cannot afford, because you don’t want to set yourself up to default on your loan.

The bottom line is that you must consider your loan term — the number of years you’ve already paid into the mortgage and the number of years for your new loan — in order to make the best financial decision.