Just as it seems mortgage rates can’t get any lower, they drop yet again. Today’s mortgage rates are near the lowest we’ve ever seen. As rates fall, even people who have refinanced their mortgage in the last few years are wondering if it’s time to refinance again.
Which brings up the question: Can you refinance too often?
“The answer is, it depends,” says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York. “It depends on the answer to several questions: How long do you plan to stay in the house? Do the benefits outweigh the costs?”
The cost of refinancing varies by your location, but you typically pay for an appraisal, title insurance and recording fees, as well as any additional fees charged by the lender. If, for example, you pay $4,000 to refinance and cut your payment by $200 a month, you’d need to keep the loan at least 20 months to break even.
“People get fixated on interest rates,” Rodriguez says. But, for example, cutting the interest rate on a $200,000 loan from 4 percent to 3.5 percent saves only $56 a month. If you pay $4,000 in closing costs to refinance, it will take you almost six years to break even.
That’s the simple math. You also want to look at whether you’re lengthening the time it will take to pay off your home and how much principal and interest you will have paid at the end of the break-even period or by the time you sell the house.
Even a “no-cost” loan has costs, though the lender fees may be replaced by a higher interest rate. “If you’re taking a zero-cost loan, you’re not getting the best rate,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area. Some loans add the closing costs to the loan balance, which means you’re financing them over 30 years.
If you’re going to stay in the home, paying points (fees based on your loan size) to get an even lower interest rate might be a better deal. “If you keep the home, it’s by far the cheapest way to go,” Fleming says. “If you’re going to keep it more than about five years, it makes sense to pay as many points as a lender will allow you to get the lowest rate possible.”
And you don’t need to worry about dinging your credit since refinancing doesn’t hurt your credit score in any meaningful way.
“It doesn’t harm you in any way with the exception that you’re always restarting your amortization period,” Fleming says. “Every time you get a new loan, your score drops. Once you demonstrate you’re making payments on the new loan, it goes back up.”
Cash-out refinancing, in which people refinance into larger loans as their home’s value grows, is regaining popularity as Americans add more equity, Fleming says. This can be good option for homeowners who want to remodel their home or build an addition, but it can be trouble for people who take cash out for the wrong reason – to buy a car, for example – which will be long gone before the 30 years of payments are made.
If you’re taking out cash to pay off credit card debt, experts warn you to be careful. If the debt was caused by a one-time event such as a health crisis or job loss, refinancing might be a good alternative to paying 24 percent interest. But if you ran up credit card debt because you’re spending more than you make, refinancing may be a mistake.
“If they’re refinancing to pay off credit card debt, then why are they overextended?” says Sylvia Gutierrez, a mortgage professional in Miami and the author of “Mortgage Matters: Demystifying the Loan Approval Maze.” “Some people continuously mismanage their money and refinance to catch up.”
For some homeowners, a home equity line of credit may be a better option. It’s less expensive than refinancing, and the payments vary based on how much you use.
Other alternatives to refinancing are making extra payments or doing what’s called recasting the loan, where you make a large lump-sum payment on the principal and have the balance recalculated to cut your monthly payment. Lenders that allow recasting usually charge several hundred dollars, but that’s significantly cheaper than refinancing. Those who qualify might also consider refinancing through the Home Affordable Refinance Program, which offers a streamlined process to lower interest rates for homeowners who have a loan owned by Freddie Mac or Fannie Mae, with little or no equity.
Here are seven questions to ask before you refinance again:
How much money will you save? Look at not only your monthly payment, but also calculate how much more interest you’ll pay by extending the life of the loan, based on how long you expect to be in the home.
How much will the loan cost? Add up lender fees and third-party costs such as transfer taxes and title insurance. Remember that even if you don’t pay those costs upfront, you are still paying them.
How long do you plan to keep the loan? If closing costs are high and savings are low, you may not save any money if you’re not planning to stay in the house more than five years.
Are there cheaper alternatives? HARP refinancing, recasting the loan and a home equity line of credit are other options. Some lenders may also do a cheaper, streamlined refinancing for existing customers. In some cases, paying extra principal could be a better financial move.
Can you still qualify? Mortgage rules have been tightened considerably in recent years. Be sure you still have the credit score, income and loan-to-value ratio to qualify under those rules before you apply.
How long do you want your loan to last? If you’re 10 years into a 30-year loan, refinancing starts your 30 years all over again. On the other hand, refinancing into a shorter loan with a lower interest rate could be a smart financial move.
Will refinancing save you in other ways? If you have an adjustable-rate mortgage, refinancing is one way to lock in a low rate now. If you have a Federal Housing Administration mortgage, which requires paying mortgage insurance for the length of the loan, refinancing into a conventional mortgage is the only way to get rid of that cost.