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October 1st, 2010

Is it time to stop refinancing?

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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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3 Responses to “Is it time to stop refinancing?”

  1. Mitch Says: October 2nd, 2010 at 10:09 pm

    Interesting post, and I agree with it a lot. My wife and I refinanced in 2003 when interest rates initially fell pretty low. Recently we were going to try again, and actually made it to the stage of giving the bank some information.

    However, they got something wrong, and as I started thinking about it I told my wife I was sort of uncomfortable starting over, even at a lower rate, when we now have 7 years of payments invested. So we got out of it, and I personally feel much better about things.

  2. Tim Manni Says: October 5th, 2010 at 12:08 pm

    Mitch,

    While I don’t know what your interest rate is, but since you have 7 years invested, have you thought about a 15-year mortgage. While the shorter term would increase your monthly payments, a lower rate could help offset things…Something to think about. Thanks for commenting,
    Tim

  3. I can't refinance my house without my husband's signature. What should I do? | Ask The Money Coach Says: November 19th, 2010 at 1:10 am

    [...] Is it time to stop refinancing? (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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