Did you refinance your mortgage a few years ago when refinance rates were at near historic lows? Depending on your situation today’s refinance rates still might be lower and you could find yourself asking, “Should I refinance my home loan 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.
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.
There’s More To Life Than Low Mortgage Rates
One of the most common mortgage mistakes is focusing only on getting the lowest possible refinance rates at the expense of fees. While it’s true that the interest rate you get along with your chosen term length are responsible for your payment amount, the fees you pay at closing actually make or break the deal you’re getting.
The more you pay at closing for things like the loan origination fee, the less benefit you’ll get from lower refinance rates. Before you realize any benefit from mortgage refinancing you have to recoup the closing costs. The only way to break even on your refinancing fees is by lowering your payment
Considering cash-out refinance rates? It’s not possible to break even with this type of mortgage refinancing because your payment is going up. In most cases treating your home like a bank account is not a good idea if you’re trying to save money.
Beware overpaying your loan origination fee or agreeing to pay discount points because these fees lengthen the amount of time it’s going to take to realize any benefit from your new home loan.
Are There Tax Consequences To Consider?
It seems like every year politicians talk about reducing or even eliminating the mortgage interest tax deduction. This probably won’t happen any time soon; however, if you’ve been enjoying that deduction in April, one simple consequence of getting lower mortgage rates is a smaller tax deduction.
Should you refinance your home loan again? It is possible to calculate the approximate amount of time it’s going to take you to break even recouping those pesky out-of-pocket expenses. This can help base your decision for or against home refinancing.
There is a catch though; the approximation only works if you’re moving to a shorter term-length. If you’re going from a 30-year home loan to a 15-year mortgage you can approximate the break-even point. It doesn’t work if you’re going from a 15-year mortgage to a 30-year term because of the interest you’re paying on those extra years.
The easiest way to do this is to add up all of your closing costs and divide by the amount your payment is going down each month. Suppose for example it’s going to cost you $5,000 to get a lower interest rate, which lowers your payment by $250.
Divide your refinance fees of $5,000 by the $250 you’re saving and you’ll find that it’s going to take 20 months, just under two years to break even.
You Can Minimize The Downside By Going Shorter
If you’re already paying on a 30-year home loan you can minimize the risks of refinancing by choosing a shorter term-length. 15-year terms are a popular choice for mortgage refinancing.
Rates on 5/1 and 7/1 ARMs are even more attractive as long as you understand what you’re getting yourself into.
Another trick to getting the best deal on your next home loan is to pay less at closing. Remember that loan origination fee? The less you pay to the broker or lender at closing the faster you’ll break even. One percent for loan origination is standard but you can negotiate to pay less and shop around for lower fees.
I’ve seen credit unions that charge as little as a flat $400 for the loan origination fee.
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