Home loan interest rates have moved downwards to never before levels and you’ve recently refinanced your mortgage. How soon can you go in for another refinance? In the current scenario, this is a very valid question.
According to the law, you’re free to go ahead but you need to consider the pros and cons before you actually proceed with another refinance.
Consider prepayment penalties
When you refinance within a short period of a previous refinance, your existing mortgage will probably have a prepayment penalty. This is almost certain if the mortgage is less than a year old. In case your current mortgage is a “no cost” refinance or mortgage, there are greater chances of a prepayment penalty when the time interval between refinances is less than 3 to 5 years.
Penalties on prepayment can be quite steep, sometimes equal to six months interest on the existing mortgage. This is not easy to stomach, so make sure you take this into account when you’re looking at what you’d save by refinancing.
If you’re trying to refinance via the same bank as the previous mortgage, they might be reluctant to co-operate if your mortgage is less than 1 year old.
Consider interest, expenses and time
Whether you’re going to be saving money is the only real limitation on when you can refinance. You need to look at three things – the rate of interest, closing costs, and the period you’re expecting to be in the home.
A rule of thumb that is generally followed is that you shouldn’t refinance if you do not save at least a complete percentage point as compared to your current rate. However, an important question is whether the reduction in interest rate is sufficient enough to offset the closing costs. This in turn depends on the period you’re going to be in the home. Many deals will prove unworthy if you’re planning to shift residence in a few years.
It’s also important to control your closing costs as much as possible. If you’re able to negotiate and bring closing costs down by even 0.5 percent of the mortgage balance, you’ll be able to recoup costs in a shorter period and the deal becomes more attractive.
The “zero-cost” refinance scene
People are often attracted to supposed “zero-cost” or “no-cost” refinances. The actual scenario involves rolling closing costs into the loan by means of a higher rate of interest. These might be good deals if you plan to be a home owner for a short time. When you plan to stay longer than 6-8 years, you’d be better off with a lower interest rate and rolling of fees into the loan balance. Additionally, zero-cost mortgages usually include penalties for prepayment to make sure you keep the loan long enough for your lender to cover his closing costs.
When you’re considering shortening your mortgage term, say moving from a 30-year loan to a 15 to 20 year one, you need to see whether the accelerated payments are affordable and how much interest you’ll save in the entire term. This term would be the tenure of the loan or the period you’ll be the home owner – whichever is shorter.
The Home Loan Advisor can analyze your property, current market conditions, local market comps, and other variables in our proprietary algorithm. We can also match you with potential lenders who have products that may help you and provide you with a sense of stability. As an added feature of the Home Loan Advisor service, we provide you with a free home value report generated from Neighborhood IQ.