The way mortgage rates have been falling the past three years, a
lot of homeowners are not only refinancing their mortgages, they're
doing it for a second or even a third time, maybe more. Should you
Many homeowners are leery of refinancing again because they're
heard it's not a good idea to refinance too often. And that's true
- continually refinancing in pursuit of ever-lower mortgage rates
can be a recipe for financial disaster, piling up origination fees
faster than you can pay down your mortgage by refinancing.
The key though, isn't how often you refinance but how much you
save by refinancing. If you can whack a full percentage point off
your current interest rate, it's probably going to make sense to
refinance again, even if you previously refinanced just last week.
At the same time, if you're only going to shave off a quarter of a
percent, refinancing is going to be hard to justify, even if you've
had the same loan for 10 years.
The problem with frequent refinancing
Here's the problem with refinancing too often. Every time you
take out a mortgage, either to buy a home or refinance your current
loan, you pay origination fees. These typically run from 3 percent
to 6 percent of the loan amount. You can pay for those up front,
but many people simply choose to have them added onto the loan.
This makes it pretty clear why it's not a good idea to refinance
too often. If you have a $200,000 mortgage and refinance every six
months, that's $6,000-$12,000 in fees you're tacking on twice a
year. With a 30-year mortgage, you'd be piling on new debt faster
than you can pay it down with your regular payments.
So how often should you refinance?
The main thing about refinancing is that it should save you more
than you pay in fees to refinance. Obviously, you're not going to
realize those savings immediately, but over time as your savings
from a lower interest rate add up.
If refinancing costs you $6,000 in origination fees but saves
you $100 a month on your mortgage payments, it's going to take you
60 months, or five years, to reach your "break-even" point where
your savings exceed what it cost you to refinance in the first
place. If it saves you $150 a month, you'll reach your break-even
point in only 40 months, or less than 3 ½ years.
This doesn't mean you have to reach your break-even point before
it makes sense to refinance again. Any savings from your new
refinance are on top of what you saved from your last one. So if
your first refinance saved you $150 a month, and you can save
another $100 by refinancing again, you'll be saving $250 a month
over what you were paying on your original mortgage.
So generally speaking, you should only refinance as often as you
can save enough to make it worthwhile.
About break-even points
The important thing is that you should be able to reach your
break-even point in a reasonable time. Five years or less is pretty
reasonable - you'll be saving enough that you'll "pay off" your
origination fees quickly enough to make it worth your while.
If you're looking at eight to 10 years to reach a break-even
point though, you really ought to consider whether you'll be saving
enough to make it worthwhile. Many people don't even stay in the
same home that long, meaning you might move out before you even
reach your break-even point. And if you move just a few years after
that, how much have you really saved?
Generally, if it's going to take you a decade to reach your
break-even point, you're probably not saving enough to make
refinancing worthwhile, even if you expect to be in the home longer
than that. You may find there are other ways that provide a better
long-term return on your money than refinancing to obtain such a
How much will you save?
The general rule of thumb is that you shouldn't refinance unless
you can save a full percentage point - for example, reducing your
rate from 5 percent to 4 percent. However, that's not hard and
fast. How much you're going to end up saving depends on other
factors as well, including the size of your mortgage, how long
you've been paying on it and the length of the term of the new
mortgage you'll be taking out.
The only way to really know how much you'll save is by using an
online mortgage calculator, such as one in the links on this page.
This lets you enter your loan amount, interest rate and length of
the loan to determine exactly what your new mortgage payment will
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