How often should one refinance?
I got this question a while back on a forum about home financing. The easy answer is that there's insn't an easy answer. Everyone's situation is different.
User "Krogg" asked:
"I have noticed over the last decade that interest rates have fluctuated. Getting a rate at 5% years ago was great, now we are seeing 2.99%. What if you refinance and 2 years later the rates drop, should you apply to refinance?
I have never refinanced, but we did get a 3.9% 1 year ago. We probably wouldn't qualify for a 2.99% because of our credit situation now, but what if our credit scores never changed, would it be wise to refinance?
Is it a general rule to refinance any time you can get a lower rate? I know it is a hard pull, doing it too much in a certain period can be a bad thing, what is the idea here?"
This was my response:
Hi Krogg
You shouldn't apply for a refi but you should seek a consultation. If you like the numbers then submit an application.
It depends on what terms are available to you. Again, you should seek out a consultation to figure this out.
There are no general rules because everyone's situation is different. You should look into your options and decide based on the terms that are offered to you.
A lot of people are saying that it isn't worth it to refi unless your rate goes down 1% or you shorten the loan term. However, these are generalizations and flat out wrong. The following is a real life scenario that I ran into recently. Obviously, I changed the names. The numbers, however, did not change and they are accurate to the penny.
Mario bough his house in May of 2014 for $375,000.00 and put 20% down. He got a $300,000.00 loan on a 30 year fixed mortgage @ 4.625% and today his loan balance is exactly $293,639.45. Mario heard on the news that rates are down so he called his mortgage broker to inquire about refinancing. Mario’s broker sent back the following quote:
30 Year Fixed – 4.125%
$293,639.45 Loan Amount
$1,423.12 P&I / Month
NO CLOSING COSTS
Should Mario take the deal?
Some people would say no because it doesn’t follow the rule of thumb (1% reduction) or reduce the term of the loan.
I disagree and here is why:
Mario is 14 months into his current loan. He took out a 30 year loan which consists of 360 payments. This means Mario has 346 payments left. Based on his current rate of 4.625% his principal and interest payment is $1,542.42 which means he will pay a total of $533,677.32 if he keeps his current loan and never re-finances it:
$1,542.42 x 346 = $533,677.32
The new loan offered to Mario by his mortgage broker has a lower monthly payment at $1,423.12 but it would start his term over and he would pay for 360 months instead of the 346 he has left on his current loan. Let’s see what that comes out to:
$1,423.12 x 360 = $512,323.20
Mario would save $21,354.12 over 30 years by going with the new loan!!! And, he would save $119.30 per month which is money in the bank or money he can use to pay other debts off.
But wait, it gets better! Mario may not need the extra cash flow. He could keep paying $1,542.42 each month and apply an extra $119.30 towards principal to pay the house off faster. How much would he save if he did that and how quickly would he pay off his house?
Well, he would save $34,747.47 and pay the house off 4 years and 2 months early.
That’s right. He would pay his house off sooner than if he kept his current loan AND he would save almost $35,000.
Don’t take my word for it – check my math and see for yourself:
http://imgur.com/7nKx301
This is the calculator I used to produce the report outlined above:
http://www.bloomberg.com/personal-finance/calculators/mortgage/
Good luck and remember to do your homework! Don't base your financial decisions on rules of thumb!
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