Question:

How often should I refinance a mortgage?

Answer:

Homeowners can refinance a mortgage anytime and as often as they want.

If you want to refinance for the second, third, fourth or nth time, you can. You can refinance your mortgage as long as a mortgage lender is willing to offer you the loan. However, you should refinance only if you really need to or if you can really save money by doing so.

Many people see only interest savings and deem refinancing as often as possible as the better option. What they fail to realize is that the cost of refinancing can add up. Such refinancing costs can more than readily offset whatever interest savings you may realize from mortgage refinancing.

The Cost of Frequently Refinancing a Mortgage

Whenever you refinance a mortgage, you pay loan origination fees. You paid the same fee when you took out your original mortgage - and you'll keep paying this fee every time you refinance. Ergo, the more often you refinance, the bigger your loan closing costs will become.

Example:

If you refinance a $200,000 mortgage 5 times, this is what will happen:*

Principal Loan origination fees
First refinance $200,000 $2,000
Second refinance $190,000 $1,950
Third refinance $180,000 $1,900
Fourth refinance $170,000 $1,850
Fifth refinance $160,000 $1,800
Total $9,000

*assuming that the mortgage principal declines by $10,000 every time and the loan origination cost is always 1.0% of the loan value

In the above example, you'll pay a total of $9,000 just in loan origination fees for refinancing five times. The only way you can justify this cost is if every one of your refinance led to significantly lower interest rates.

When refinancing a mortgage, you need time to recoup your loan costs through interest savings.

Loan origination costs cannot be immediately recouped through interest savings. Using the above example, let's say that shifting from your original mortgage to the first refinance will save you $75 in interest every month.

In this case, it will take you around 27 months before you can get back the $2,000 you paid to close the loan. Thus, if you don't stay with your refinanced mortgage for at least 27 months, you won't even reach break-even point. If you refinance within a year, you'll get $900 in interest savings but be out-of-pocket by $1,100.

Refinancing Lessons to Remember

  • Do not forget to consider the loan origination costs involved in refinancing a mortgage.
  • Do not refinance frequently. Doing so reduces your chance of recouping your loan costs and benefiting from a refinance through interest savings.
  • As a corollary of the above, stick to your mortgage long enough to get at least your loan costs back.
  • Another corollary: refinance a mortgage only when absolutely necessary and when doing so entails significant interest savings in the shortest time possible.
Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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