How Often Should I Refinance?

Dear Liz,

Every time I look at the news it seems that the best mortgage rates in years are available if I refinance now. I refinanced five years ago and then two years ago; is it too soon to refinance again?

Montana Max

Dear Max,

There is no rule against refinancing as often as you please; however, the costs involved mean that you shouldn't chase the lowest mortgage rates and exclude all other considerations. Unless you are refinancing to fix an adjustable mortgage rate or cash out some home equity, you are likely refinancing to save money each month. You want to refinance when you can recoup the costs of refinancing fairly quickly, that is, when the monthly interest saved is sufficient to pay for the lender and third party charges associated with the mortgage refinance.

Beware of Bogus "Savings" Calculations

Some loan officers may perform some rather misleading calculations when trying to show you how much you would "save" with a mortgage refinance. They might show you, for example, a loan with a payment much lower than what you currently pay, but it might not represent true savings. Here's an example:

Bob has a $325,000 mortgage at 6%; it's balance is $302,427; his payment is $1,949, and he's been paying it for five years. His neighborhood banker claims that Bob could refinance to 4.875% and save $349 a month! But how much of that is real savings? First, if Bob just took his remaining balance at the same interest rate and started a new thirty year term, his payment would drop to $1,813, but clearly there's no real savings if the interest rate doesn't change--it would, however take five years longer to retire the mortgage, and the interest paid over the life of the loan would increase. So what's the actual savings derived from a 4.875% interest costing $10,000?

Use the ShopRate.com Refinance Calculator

If Bob used Shoprate's refinance calculator instead of his guy at the bank, he'd get better information. It shows a net savings of negative $1,469! Bob may still want to refinance to get a lower monthly payment--that's okay, as long as he's aware of the full price of refinancing. Bob has another option--he could just use that $10,000 to prepay his principal balance. By entering a new loan balance of $292,427, a rate of 6%, a term of 25 years (the remaining term on his current loan), and zero closing costs into the mortgage calculator, he can see that just prepaying his balance would save him $19,467 over the life of the loan.

When Refinancing Always Makes Sense (Even if You Did One Last Week!)

Any time you can get a no-cost refi with a lower interest rate, go for it--you have no break-even period, so the savings goes straight to your bottom line. You can use the savings to prepay your loan, retire it faster, and pay less interest.