Should you become a 'serial' refinancer?

Posted by  on Jul 09, 2012

If you've enjoyed the benefits of refinancing before but mortgage rates have since dropped, is it time to consider doing it again?

With mortgage rates continuing to hover around record lows, it's a question worth asking. But while low rates can seem enticing, you should always examine whether the costs of your refinance could outweigh the benefits. Even if you wrap closing costs into the loan (effectively raising your principal) or opt to pay a slightly higher interest rate, you're still paying something for that new loan.

But if you crunch the numbers and they come out in your favor, becoming a "serial" refinancer could be a great option.

Reasons to consider refinancing again

If you fall into any of these categories, refinancing now -- regardless of how many times you've done it before -- may make sense:

1. Rates are lower than when you refinanced last. If mortgage rates have dropped since your last refinance, you may want to use a mortgage calculator to determine what your new principal and interest payments would be. You can then compare those savings against the costs associated with a refinance to determine whether it's worth it.

2. You'd like a shorter term. A lower mortgage rate could enable you to afford the payments on a 10- or 15-year mortgage loan instead of a 30-year loan. While your monthly payments will be somewhat higher, you could save thousands in interest payments and become mortgage-free faster.

3. Your credit has improved. If your credit score is higher than last time you refinanced, you may now qualify for a lower mortgage rate. Conventional lenders use risk-based pricing that requires higher interest rates for borrowers with a credit score lower than 740.

4. You have cash. If you have money set aside, you can pay down your principal balance to reduce your monthly payments when you refinance or eliminate private mortgage insurance (PMI) premiums, which are required on conventional loans with a loan-to-value of more than 78 percent. You can also use cash to pay your closing costs so you don't add to your principal balance with your refinance.

5. Your income has increased. In addition to reviewing your credit score and your home equity, lenders review your debt-to-income ratio. A lower debt-to-income ratio will improve your chances of a mortgage loan approval. In addition, you can use the extra income to make larger principal payments on your mortgage even after you refinance. The combination of a lower mortgage rate and extra payments will eliminate your mortgage faster.

6. Your home value has stabilized. If, like many homeowners, your home value declined during the housing crisis, you may find the value has stabilized or even increased slightly. So if you were unable to refinance before because of declining home equity, you may qualify now as a result of stabilizing values and your continued payments.

7. You plan to own your home forever. If you plan on selling your home in a few years, another refinance may not make sense because of the time it could take to recoup your costs, which average about 2 percent of the loan amount. But if you intend to stay in the home for the long term, lowering your mortgage rate will have a bigger impact.

Whether you have refinanced once or twice or even three times, it always makes sense to review your refinancing options at least annually to see if a new mortgage loan could improve your finances. And with today's mortgage rates being so low, locking in today could be a decision you'll appreciate for years to come.


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