Rock-bottom interest rates and consumer frustration over the squirrely economic recovery have some homeowners adopting an investment strategy borrowed from the boom years: serial refinancing.
Given the right circumstances, refinancing your home can help you:
- Save on closing costs.
- Lower your monthly payment.
- Shorten your loan term.
- Tap and repurpose your home equity.
- Reduce the amount of interest you’ll pay overall.
- Ditch private mortgage insurance, or PMI.
Serial refinancing through the years
How often is too often to refinance a home? History provides some insight into this phenomenon.
Approximately 3.5 million U.S. homeowners refinanced at least twice between 2006 and 2008, and another 2.2 million homeowners did the same between 2009 and 2012.
Those trends made sense: The former group was likely tapping equity to cash in on the waning days of the housing boom, while the latter was jumping on the opportunity to lower 5% to 6% boom-era mortgage rates following the housing bust.
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What’s driving the refi rumba today?
CFP professional Bob Klosterman, founder of White Oak Wealth Advisors in Minneapolis, cites several factors:
- Near-historic low interest rates: Mortgage rates continue to flirt with historic lows, with the average 30-year fixed-rate refi being around 3.6%. That translates into a monthly payment of about $455 per month in principal and interest for every $100,000 you borrow. You can use Bankrate’s mortgage calculator to estimate your monthly payments.
- Miscues from the Fed: “Based on what was projected this time last year, we should probably have been at 2% on the fed funds rate by now. Instead, we’re wondering if they’re going to lower it again and do some sort of stimulus program,” he says. “We’re in an odd environment, no question about it. The economy is just not robust enough to risk the unknown impact of those higher interest rates.”
- Mortgage lenders are hungry: “The mortgage community’s compensation is driven by how many mortgages they originate, so they’ll take any opportunity to create some interest in refinancing,” he says. “The question is whether it’s a good idea for you.”
- Consumers just wanna have funds: “Part of the return on a home is the fact that you would have paid rent anyway. The fact that you’re supposed to have the home paid off someday seems to have been lost in space somewhere,” he says. “Where the goal used to be to pay off your mortgage, today the goal seems to be to pay as low a payment as possible.”
- The Brexit vote: Great Britain’s decision to exit the European Union threw yet another wild card into the stock market, sparking interest in other, more predictable investments.
In addition, the Federal Housing Administration reduced the private mortgage insurance (PMI) rate charged on FHA-backed loans from 1.35% to 0.85% in 2015, resulting in an average annual savings of $900 for new homebuyers and refinancers. That helps refinancers decrease their monthly payments and enables FHA borrowers with sufficient equity to refinance to a conventional mortgage and be done with PMI altogether.
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When it makes sense to refinance
During the housing boom, the prevailing wisdom among financial advisers was to forgo refinancing until rates dropped 2% or more below your current rate, provided you planned to stay in the house long enough to recoup the upfront costs.
But the lure of historically rock-bottom rates, combined with attractive “no closing costs” sales pitches from loan originators, now has serial refinancers dancing the refi rumba based on rate drops of as little as 0.3%.
Klosterman calls such moves unrealistic, at best.
“If I were sitting with a 5%, 30-year fixed mortgage and could drop it to 3.25-3.5%, I’d consider doing it and shortening the term,” he says. “But if you’re already sitting at 3.5% or 4%, its frankly more hassle than it’s worth.”
Doing the cost-benefit analysis
Diana George, founder of Vault Realty Group and president of 946 Bay Capital, a real estate investment firm based in Oakland, California, goes one step further.
“That’s crazy!” she says. “I think the only pros to serial refinancing, or refinancing in general, are to get out of an adjustable-rate mortgage or obtain better terms, such as cutting a 30-year mortgage to 15.”
She explains that lenders typically charge 1%-plus to refinance, either in upfront fees or, in the case of “no closing cost” loans, tacked onto the interest rate.
“What it boils down to is, how are you going to make those fees back? Do you see yourself living in your house long enough to do that?” she says. “If you’re going to stay put 3 to 5 years, maybe it makes sense, but if you’re planning to move out in 6 months or a year, then you’re throwing your money away.”
Klosterman adds an additional downside to serial refinancing.
“The concern I have is, if you start out with a 30-year mortgage, every time you refinance, you still have a 30-year mortgage,” he points out. “It just keeps resetting the clock.”
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When another refi makes sense
To reap the rewards of refinancing, you’ll need a steady income stream, an eye for contract details and a resolve to ride your homeownership past the break-even point where you’ve recouped the refi costs. If your credit score is a bit shaky or you owe more on your current loan than your home is worth, you may not be able to wrangle a refi that’s worth the effort.
If refi you must, our experts offer these 4 tips
- Identify your real savings. Chances are, some or all closing costs fall on your side of the ledger, typically in the interest column, even with a “no closing cost” refi. Find out what that will cost you over the life of the loan before you commit.
- If you’re staying put, pay closing costs upfront to reduce your overall interest outlay.
- If you’re a short-timer, select a no-fee loan to maximize your upfront savings.
- Supersize your refi by putting the money you save into additional principal payments. That will reduce your overall interest expense, regardless of how long you stay.