Should You Refinance Again?

When the rates on a 30-year fixed-rate mortgage were holding fairly steady just below the 5.0 percent mark early in the year, you took advantage of it by refinancing. Then, you watched as the rates fell—all the way down to 4.0 percent—as the months went by. You used to be happy with your interest rate, but now…

So the question is: Should you refinance again—even though you just refinanced?

Generally, refinancing makes sense if your new rate is going to be at least 1.0 percent lower than your current rate. However, that’s just a ballpark figure. To see if refinancing again is right for you, you’ll need to look at your financial situation, your current mortgage and new loan options.

Before you do anything else, run the numbers. You may lower your monthly payment by refinancing, but will you save money in the long run? As a simple example, let’s say you refinanced in January and it cost you $1,800 to lower your monthly payment by $50. You’ll break even in three years. However, if you refinance again in November, you’ll still be more than two years away from that break-even point—plus you’ll have the new loan’s break-even point on top of that. Is it worth it? Yes, as long as you’re planning on staying in your home for several years.

You should also talk to your broker or lender about your current mortgage. They can let you know if there are any restrictions on refinancing again so soon or if there’s a penalty for paying off your loan early. Known as a pre-payment penalty, this penalty is spelled out in your loan in a clause that states: “If you pay off the balance of your loan within X number of years from the date obtained, you will pay a penalty of Y percent of the total loan amount.” When you crunch the numbers, make sure you factor in any pre-payment penalty, if applicable.

Finally, you may want to look into a loan with a shorter term. Now that the rates are close to 4.0 percent, many borrowers are refinancing into 15-year fixed-rate mortgages from their 30-year fixed-rate mortgages. Is this an option for you? Will you be able to afford the monthly payments? Once again, you’ll need to run the numbers and talk to your broker or lender to see if this is a sensible alternative. In the long run, you may not save on monthly payments with a 15-year loan, but you may save on interest.

In the end, your decision to refinance should not just be based on the low interest rates. Yes, the rates may be enticing, but make sure that refinancing now makes sense for your financial situation. ∆