Maybe you’ve already capitalized on low-interest rates and refinanced your home once, or perhaps you switched from a fixed loan to an ARM for better terms, and now you are considering refinancing again. Is this a wise decision? When does it make sense to be a serial refinancer?
Benefits of Refinancing
Homeowners may be interested in refinancing for several reasons:
- Taking advantage of a lower interest rate and saving money long term
- Reducing the amount of monthly payments
- Having a consistent monthly payment by switching from an ARM to a fixed rate
- Using the home’s equity in a cash-out refinance
- Combining a first mortgage and a home equity loan
These are all valid reasons to refinance a home, but it’s important to verify that a refi is justifiable for your financial bottom line. While refinancing does have its benefits, it isn’t always advisable.
How to Know When Refinancing Makes Sense
One of the first things to consider when deciding to refinance is how long it will take to recover the closing costs. This depends on how long you plan to stay in the home and how much you are saving. For example, if refinancing saves you $150 each month on your mortgage payment and your refinance closing costs are $3,600, it will take around two years to recover the costs. If you plan to stay in your home another five years, it may make sense to refinance.
Likewise, with the same monthly savings and closing costs of $1,000, a refinance will break even within seven months. Some lenders are even offering “no cost” refinancing. If you can lower your rate for no additional costs, why not do so? Check with your lender to learn about details and get help assessing whether this makes sense for you.
Consider how much more you would pay for your home over the term of the loan. If you have 20 years left on the loan and you extend it to 30 years with a refinance, will you pay more in total interest? If so, it may not make good investment sense to refinance. However, if you don’t plan to extend the loan or if the savings makes up the difference, it may be a wise decision.
If you are struggling to make the monthly payments and you have the ability to reduce them, refinancing may make sense even in the absence of long-term financial benefits. However, your ultimate goal should be to either pay off the loan earlier or buy a more affordable home to maximize your investment.
What to Consider Before Deciding to Refinance Again
If you have already refinanced your home once, do some calculations to determine if you have recovered the cost of refinancing. If not, you must include the remaining expense when calculating payback time for a second refinance. Next, determine the cost savings by considering how long you plan to stay in the home.
Check your credit history and consider your employment to determine your eligibility for a loan and your best qualifying interest rate. You may want to work with an accountant, financial advisor or mortgage advisor from a reputable lender to calculate if you will be paying more for your home in the long term than with your current mortgage. Many homeowners look at the short-term benefits of refinancing, but don’t think about the bottom line for their investment.
In the end, it doesn’t matter if you have already refinanced once. If the numbers are in your favor and refinancing is a sound investment decision, go ahead and refinance again.