Is it time to stop refinancing?by Tim Manni
When mortgage rates dropped below 5.5 percent, just about everyone who could refinance hopped on the bandwagon. But rates continued to drop, shattering record after record, and homeowners who refinanced just months ago are considering doing it again.
Is serial refinancing just silly?
According to the Curious Capitalist, refinancing too often can set back wealth-building in a big way, because every time you refinance, you begin paying your mortgage all over again. In the early years of a mortgage, the lender gets the bulk of the payment as interest. Author John Curran contends that restarting that process is, in his words, “a loser’s game.”
However, if you recently refinanced, and are considering it again, you won’t be extending your mortgage term by much, and furthermore, your mortgage restart can be offset by additional principal payments if desired. However, refinancing does involve costs, and each refi can be expensive, so you want to be judicial about replacing your mortgage with a new one. A little number crunching can get you the right answer.
How often is too often when refinancing?
That depends on the cost of the refinance versus the savings realized by improving your mortgage terms. The costs of refinancing include:
- Closing costs (such as appraisal fees, lender charges and title insurance). Note: if you recently refinanced, you should be able to get significant discounts on your title insurance (this is called a “short-term rate“). Items that you may be charged, like prepaid taxes and insurance, don’t count as refinancing costs. These are costs of homeownership that have to be paid whether you refinance or not.
- Extra interest. Every time you refinance, you re-start the clock on your mortgage amortization. If you have been paying on a 30-year fixed loan for five years, and then refinance to a new 30-year fixed mortgage, you’ll end up paying on your mortgage for a total of 35 years. The total interest paid for the first five years and then the last 30 may well exceed what you would have paid had you chosen not to refinance.
The savings of refinancing can take two forms:
- Lower monthly payment. The savings on your monthly payments are derived from stretching out your balance over a new term, and paying a lower interest rate.
- Principal reduction. Additional reduction in principal is created when you select a mortgage with a shorter term and a lower rate. For example, when you refinance from a 30-year mortgage to a 15-year term.
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