No Downside to Refinancing Multiple Times

Katrina asks if there's a downside to refinancing a home often. Dave says it can be good if you save enough in interest over a year.

QUESTION: Katrina in Texas asks if there’s a downside to refinancing a home often. Dave says it can be good if you save enough in interest over a year.

ANSWER: Not as long as each time you do, you lower your interest rate enough to where you can recoup your closing costs before you move. Every time you do the transaction, it has to work out. The way you do a refinance—and most people do need to be refinancing right now—is you calculate how much interest you will save in a year as a result of refinancing. The way you do that is multiply the interest difference times your loan balance. If you have a $200,000 mortgage and you have a 5% loan and you go to a 3% loan, which saves you 2% a year, two percent on $200,000 is $4,000. How much are the refinance costs? What are the closing costs in order to refinance? If you look at that and it’s $10,000, you divide that by $4,000. That would tell you it takes you two and a half years to get your money back. If it’s $8,000, it’d take you two years to get your money back if you’re saving $4,000 a year. That’s pretty substantial.

Truthfully, your closing costs would be lower than either one of those, so in that example, if your closing costs were $5,000, you’d get your money back in a little over a year. Even if you refinanced two months ago at 5%, if you were to drop it to 3%, you’re going to get your money back really quickly. That’s called a break-even analysis. How long does it take you to get the money you spend on closing costs back with the interest that you save? That gives you the answer of whether you should refinance again. There’s not really a “you’ve done this too often” rule. If you refinance three times in one year, it would have to be that the interest rate environment is that rates have dropped pretty substantially through that year. You really can’t do this and save an eighth of a percent. It doesn’t work out for you.

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