Some of my relatives did a mortgage refinance a little over a year ago. As low as rates were in 2009, they are even lower now.
They currently have a 15-year fixed-rate mortgage at 4.625%. Not too shabby. But they told me that they were quoted a 15-year fixed-rate mortgage of 3.5%. Absolutely crazy! We worked out the numbers on the two loans and discovered that they could save well over $20,000 in interest over the course of the loan by refinancing.
One thing I did ask them is this: “Have you paid back the first refinance yet?” They didn't know, but we plugged in some numbers and pulled up the amortization schedule from the original loan, and compared the interest they would have paid on the original loan with the amount that they paid on the refinanced loan. This interest difference was more than the cost of the refinance, so it looked like they had.
That's one of the dangers of doing multiple mortgage refinances. The refinances are not without cost, so doing too many of them can defeat their purpose, which is to save you money.
The calculation I did with my relatives was back of the envelope because we weren't completely sure of the exact numbers. If you have the numbers right in front of you, this post gives some other things to consider.
That is absolutely true! It‘s better to stay on the original mortgage price rather than refinancing again, there is always a catch when a financial institutions ask you for this. All will promise a 0% interest in a period of time but when you are about to review the proposed monthly payment there is a hidden charges that you are about to neglect if we do not look it further. That is why we have to make sure and able to review everything first before committing to another refinancing.
You state that “The refinances are not without cost, so doing too many of them can defeat their purpose, which is to save you money.”
Any previous refinancings are completely irrelevant. That money is a sunk cost, so the only factor is whether doing the current refi is better than staying put.
The other consideration is potential future refinancing: If you think it will be even cheaper later, you might decide to wait.
But the past is the past.
@Mark: That’s true, but if you refinanced a year ago and three years were needed to recoup that refinance, those two years left to repay don’t go away just because you refinance. You tack on time to the repayment time for the next refinance.
I agree that frequent refinancing probably doesn’t pay off as a long-term strategy.
Where I disagree: The two years of unrecouped costs don’t figure into the CURRENT refinancing decision. They are a LOSS, but it is over and done.
The current refi decision is independent of the previous one. It can only be based on future costs.
The lost two years don’t get tacked onto anything – they are just a cost of past decisions.
The true cost of refinance I just did is around 1% of loan amount.
For 4 year horizon – just 0.25% of rate change will break the even.