Mortgage  Question?
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Should you refinance a small mortgage?

I have a small mortgage (less than $40,000) with a high interest rate (10%). Does it make sense to refinance my loan given the closing costs I would have to pay or should I overpay my mortgage instead?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

If you can refinance into a shorter-term mortgage or home equity loan with a lower interest rate and no closing costs then it makes sense to refinance your current mortgage because the interest rate is so high. In that scenario you reduce your monthly mortgage payment without paying any costs out of pocket. The issue you may run into is that most lenders do not provide mortgages for less than $50,000 so you may need to focus on a home equity loan or line of credit (HELOC). If you belong to a credit union, see if they offer a no or low cost HELOC with a lower interest rate. HELOCs are generally an interest only loan but you can add principal to the monthly payment to pay down the loan balance over time like an amortizing loan.

If you do refinance, it is important that the length of your new loan matches, or is shorter than, the number of years you have remaining on your current mortgage. For example, if you have ten years remaining on your current mortgage, you should refinance into a new ten year loan. If you refinance into a new loan with a term that is longer than the remaining term of your existing mortgage then you could end up paying more in interest expense than you should.

If you cannot find a no cost loan with a lower interest rate then you should pay extra principal each month. Paying more than your required monthly payment is also called mortgage acceleration. Accelerating your mortgage reduces the length of your loan and can save you thousands of dollars in interest expense over the life of your mortgage. We provide a thorough overview of How Mortgage Acceleration Works on FREEandCLEAR and you can use our Mortgage Acceleration Calculator to evaluate different acceleration scenarios for your loan.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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