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Should you refinance again?

Even if you just refinanced not so long ago, the benefits of doing so again may well outweigh standing pat.

By MSN Money Partner Feb 6, 2012 4:22PM

This post comes from Brian O'Connell at partner site MainStreet.


MainStreet on MSN MoneyWhen it comes to mortgage rates, homeowners have been watching just how low they can go and reacting accordingly to historically rock-bottom interest rates.


When rates hit 5%, the rush to refinance was sizable. When rates fell to 4.5%, the rush to refinance was more substantial. When rates fell to 4%, the rush to refinance was downright staggering. And here we are again, with the average 30-year fixed-rate mortgage falling another rung on the ladder, to 3.87%.


With rates at "an all-time record low," according to Freddie Mac, the rush to refinance may well reach stampede status, especially with good news on jobs (last week's announcement that the unemployment rate fell to 8.3%) and more bullish sentiment elsewhere on the economic front. Post continues below.

Refinancing, even if you just did it six or nine months ago, certainly makes plenty of financial sense these days. Freddie Mac is out with a report stating that 49% of homeowners who refinanced their mortgages during the fourth quarter of 2011 reduced the principal balance on their mortgages -- the highest percentage in 26 years. (Should you refinance? Try MSN Money's calculator.)


The study also shows that the median interest rate reduction was 1.4 percentage points, a 26% savings on mortgage interest rates, and during the first year of the newly refinanced loan the average dollar savings totaled $2,700 on a $200,000 home loan.


"Savvy homeowners are taking advantage of some of the lowest fixed-rate (mortgages) in more than 60 years to lock in interest savings," says Frank Nothaft, the vice president and chief economist at Freddie Mac.


So even if you just refinanced, the benefits of doing so again may well outweigh standing pat. Let's look at some reasons why it may be a good idea, and why it may not be. Here are the pros:

  • Not only will you reduce your mortgage rate, you'll reduce the principal balance on your home mortgage.
  • More cash in your wallet allows you to use that money to pay down other debt, pay off your house more quickly or add to your retirement savings.
  • If you use the extra money to pay down debt, you can improve your credit rating -- thus making future loans even more affordable. (Estimate your credit score for free.)

And for the contrarians, here are the cons of refinancing again:

  • Every time you refinance, you "reset" your mortgage payment clock to 30 years. So it may, depending on your payment volume, take you that much longer to satisfy your loan obligation.
  • Any loan process with a bank or mortgage lender is akin to root canal. Be prepared for more paperwork, more negotiations and more scrutiny on your credit rating.
  • You'll be paying fees and closing costs to refinance, and that will cut into your savings.

There's a reality check involved here, too.


Banks and lenders won't be offering 3.87% mortgage interest rate deals to just anybody. You'll need platinum-level credit -- think a FICO score of 720 and above. If that's you, great; you stand the best chance of getting a low rate and saving money on your mortgage. But the further down the FICO scale you slide, the higher your interest rate will be -- and it won't be 3.87%.


To get a good grip on where you stand in terms of refinancing, use BankingMyWay's Refinance Interest Savings calculator. Even if you refinanced in the last year, the calculator can tell you how much interest you can save if you refinance your mortgage again.


Beyond that, figure out where you are in terms of your housing situation. One rule of thumb is that if you plan on moving within five years, refinancing is a bad idea (the real savings are usually found at the back end of the deal, and the front-end savings are chewed up by closing costs and fees).


But if you have good credit and plan on being around for a while, there's no reason you can't take advantage of record-low mortgage rates.


After all, you just don't know if you'll ever see them again.


More on MainStreet and MSN Money:

Feb 6, 2012 11:31PM

If you refinance a mortgage that you have been making payments on for years with a new mortgage, remember that you are stretching out the payments.  If you have already paid for five years and get a new 30-year mortgage with a lower interest, the payments will be lower due to the lower interest rate, and also because you have paid down the principal.  Be sure to compare the total interest payments left on your old loan with the total interest payments on your new loan.


Also, if you make extra principal payments every month from the beginning of a new loan you will be amazed how much that will save you over time.

Feb 7, 2012 1:50PM

Why would the author assume everyone would stretch it back out to 30 years?  20 year and 15 year options are available.  I am in the process of a refi and our interest will go down 1 1/2 points, our term will be trimmed by 2 years and our payment will go down very slightly.  Should save $40k over life of the loan. 

Feb 6, 2012 11:26PM

The statement "not only will you reduce your interest rate but you will reduce your principal balance too"  is misleading.  That only happens if  you put money in to reduce the mortgage!


I am refinancing right now to take advantage of the good rates.

Feb 7, 2012 12:44PM
Somewhere you will pay for that reduced rate. The gift shop is down the road. If you think they do not have that  figured in, well lets say they are for themselves. They have teams of people to find ways to take your money. They are not going to hand you money. That will not happen.
Feb 7, 2012 1:23PM
There is a kind of person...they sit in nice,warm offices on Wall Street, in banks, they stare at stock reports all day and at computer screens, and talk on phones.They have never worked a day at a real job in their lives, never really worked so that it made you tired. Never left the big city. Never sweated at a job, or worried about paying a bill. They like nice​.restaurants.... They have never served in the military, never given anything to this country. Only taken,taken,taken. They would sell this country out from under you and move to Israel, or such, at the first sign of trouble here. You can see the country catching on to them Tiring of them. You can see their fear. I think the worm is turning against them.
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