Did you refinance your mortgage a few years ago when refinance rates were at historic lows? Depending on your situation refinance rates still might be lower today and you could find yourself asking, “Should I refinance again?” There are arguments against serial mortgage refinancing because it becomes too difficult to recoup your closing costs; however, there are also situations when it makes perfect sense to refinance your home one more time. Here are several of the pros and cons of home refinancing to help you make an informed decision and avoid losing your hard-earned cash.
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Serial Mortgage Refinancing Gets Expensive
Financial analysts and reporters are always predicting that refinance rates have bottomed out and speculating how the market will correct to over six percent. Despite this, depending on the type of mortgage you’re shopping for it’s still possible to get refinance rates as low as 2.87%.
Granted that’s a 5/1 Adjustable Rate Mortgage and you really need to know what you’re doing with a home loan like that; however, there are still 30 year fixed rate deals to be found in the neighborhood of 3.12%.
If you got less than a stellar deal several years ago you might be surprised to find that you can qualify for attractive rates with several of today’s best mortgage lenders.
When Is Home Refinancing a Bad Idea?
One of the biggest problems with refinancing any mortgage loan is that you’re resetting the clock on your home loan’s amortization. Mortgage amortization is a fancy term that simply describes the process of paying down your home loan over time.
Your mortgage loan is front-loaded with interest, meaning in the early years the majority of your payment goes into the lender’s pocket as interest. Over the years this gradually shifts and you begin building equity in your home at a faster rate. As soon as you refinance the rate you’re building equity all but grinds to a halt.
If you’ve been paying ten years on a 30-year fixed rate mortgage and you refinance with another 30-year home loan, you’re right back where you started stuffing cash in your lender’s pockets.
Depending on where you live in the country slowing your progress of building equity could also result in being underwater, meaning you owe your lender more than your home is worth.