refinance

Snag lower rates with serial refinancing?

Don TaylorQuestionDear Dr. Don,
Is there any reason not to refinance a mortgage multiple times within a year, provided it comes at no cost? That would mean absolutely no fees, and we would only have to pay for the prepaid interest, insurance and transfer costs. For example, refinancing and obtaining a 0.25 percent lower rate each time while not paying anything out-of-pocket. Is this a smart practice?
-- Adam Ante

AnswerDear Adam,
My macroeconomics professor taught me the TANSTAAFL principle, which argues "There ain't no such thing as a free lunch." That applies to your situation. One way or another, the borrower pays the closing costs. They're either paid upfront, financed or are bundled in the interest rate on the new mortgage.

That said, if you can capture a lower interest rate on your mortgage than your current interest rate, and you're not adding to your outstanding loan balance or paying costs at closing, you can benefit from serial refinancing to capture small changes in mortgage interest rates.

I'm not a big fan of serial refinancing, especially within a year's time. Loan programs may require that a mortgage be seasoned before it can be subject to refinancing. Still, as shown in the example below, you can pick up substantial pretax savings on your total interest expense when you lower your interest rate. This is true even if it's just a quarter of a percentage point. The key here is to be able to reduce your interest rate even when you're paying your closing costs in the form of a higher interest rate.

Refinancing a mortgage
4%3.75%Difference3.5%Difference
Loan amount:$200,000.00$200,000.00-$200,000.00-
Loan term (months):240240-240-
Payment:$1,211.96$1,185.78$26.18$1,159.92$25.86
Total interest expense:$90,870.56$84,586.39$6,284.17$78,380.66$6,205.73

Take the difference between your old mortgage payment and your new mortgage payment, and use it to make additional principal payments. You'll save even more in interest expense. Making additional principal payments of $26.18 each month in the example above reduces total interest expense by about $3,000 for a difference of $9,241.36.

No-cost loans make the most sense if you don't plan to be in the mortgage for a long period of time. This can be either because you plan to refinance again in the short term or you plan to sell your home. If you're in it for the long haul and you can get a good interest rate, paying closing costs upfront can help you reduce your total interest expense without serial refinancing.

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