How Long Should You Wait Before Refinancing?
It’s been about 7 months since we last refinanced, and we’re at it again.
Last March we locked in at 5.00% on a 30 year mortgage. Back then you could get a 15 year loan for about 4.75%. While we could afford the 15 year payments, we didn’t think it was worth it to lock into the higher payment for a reduction of only .25%.
About 2 weeks ago, loans were again at multi-year lows (I saw that the 30 year loan dipped down to 4.875% for a few days, and I’ve heard reports that it hit 4.75% briefly but didn’t see it).
This time, instead of just .25 points difference between the 30 and 15 year loan, the difference was .625 – taking the 15 year rate down to 4.25%. We simply couldn’t pass up the opportunity to reduce our interest rate by another .75%.
Our loan balance is close to $300,000, making each point of interest worth about $3000/year. At 75 basis points, the interest reduction is $2250 / year, or about $185 / month.
Of course, our payment is going up–it’s a 15 year loan, so the principal payment each month will be higher. We’ll be working hard to stay within a smaller non-house budget. I’m OK with that… As I’ve said before, I think paying down a mortgage is the best choice for a conservative component of an investment strategy in today’s economy. If you’re interested in seeing just how much more the costs would be for your home, you can check out our simple amortization and payment analysis article for really simple math on the subject.
I mentioned to a friend that we were refinancing again, and I got a response I might have anticipated: didn’t you just do that?
Well, yes, we did.
In March, we reduced our interest rate by .75% with a payback period of about 18 months. That got us from 5.75% down to 5.00%. When we refinanced then, we had no idea we’d be faced with an opportunity to pick up 4.25%. Had we known it, we would have waited. But who can know these things?
No one can, so you have to make the best decision you can with the information at hand. And the information today is that rates are again .75% lower than our current rate. Our payback period on this new loan is around 20 months. We’re planning on staying in this house for years, so it makes sense for us to refinance.
There’s No Limit on How Often You Should Refinance
That’s right – there’s no limit.
See, even though we’re refinancing again, our payback analysis from that loan in March is still valid… Just because we’re refinancing now doesn’t mean we aren’t getting the savings from that early-year decision. It stood on it’s own then and it still does today. That loan will make fiscal sense 18 months after it’s close date in March, 2009.
And this loan will make fiscal sense 20 months after it’s close date in January, 2010.
If we wake up in February, and the market offers us a 3.5% fixed interest rate, we’re taking it… and so should you.
What do you think? Have you ever felt like you shouldn’t refinance because you “just did it?”
Comments & Conversation on this Article...
7 Responses to How Long Should You Wait Before Refinancing?
Wait! Got a question on your own project?
Ask your question in our Home Improvement Help Forums.
Otherwise, leave a note here!
December 22nd, 2009 9:19 am
Hey Fred!
Good to know the rates are so low.. it’s definitely hard to time the market — even the mortgage market. Our calculations on when it’s a good time aren’t as easy because we have an adjustable rate (at just 3.5% right now!) and we’re not sure how long we will stay in our current home… so it’s some extra variables to contend with. With these new rates, I think we could ‘break even’ in 2 year (vs. our worst-case-scenario of adjustable rate going up). And there’s always the peace of mind with a fixed rate mortgage… certainly something to think about!
December 22nd, 2009 10:28 am
My wife and I just locked in a 30-year, 4.875% mortgage on our first house. Not bad, eh? It’s good to read some simple thoughts on when and how it makes sense to refinance, though I guess I’d be surprised if rates went much lower!
Separately, is that a photo of the house from Home Alone?!
December 22nd, 2009 10:42 am
Hi Mike, congrats on getting the 4.875 – not a shabby rate at all.
That’s our house, mid-blizzard-2009 from just a few days ago.
Beth – you are in a unique situation, something I’ve been planning to write about (when’s the right time to get out of an adjustable rate mortgage?) … basically, no one can know for sure.
December 22nd, 2009 2:04 pm
Good thing you are finishing the basement. You will have storage for all that paper work!
December 22nd, 2009 9:36 pm
Fred…gotta love the low rates…so long as the banks will actually loan the money! We keep seeing folks up this way get turned down even with great credit. We refinanced this summer at 4.875% fixed 30 yr.
December 23rd, 2009 1:22 am
We just locked in our refinance today. Like you posted in your previous post we’re getting a 30 yr mortgage and planning to pay it off in 20 yrs. This gives us some flexibility if we need it for an emergency. We do both have good credit scores though in the 770’s.
December 23rd, 2009 1:26 am
We recently dropped a point off our rate to go from 6.125% to 5.125% with a payback period on the closing costs of about 14 months. We were happy with that – we dropped a couple hundred off our monthly payment. IF we could do it again and drop even more we might consider it because we plan on being in the house for a while. If it’s worth it – why not? (beyond the hassle of dealing with the mortgage people constantly)