With current interest rates so low, many people are wondering whether they should refinance their mortgage, and many homeowners who have already refinanced in recent years are wondering whether they should refinance again and whether there is such a thing as refinancing too much.
The cost of a mortgage isnt determined just by the interest rate. If it has been many years since you first obtained your mortgage, you may be forgetting about all the fees and closing costs associated with processing the loan. If you refinance, youll have to pay those costs again, and when you add them all up, it may turn out that the refinancing process isnt really worthwhile.
[F]or example, cutting the interest rate on a $200,000 loan from 4 percent to 3.5 percent saves only $56 a month, states U.S. News & World Report contributor Teresa Mears. If you pay $4,000 in closing costs to refinance, it will take you almost six years to break even.
Not only are there fees and closing costs to consider when trying to calculate the costs versus the benefits of refinancing, it is also critical to consider the loan term. The importance of loan term length was likely at the forefront of your mind when you first bought your home but it can be easy to overlook when you are enticed by the thought of refinancing for lower monthly payments. If you extend your mortgage over a longer term while refinancing, however, it might turn out that your overall costs outweigh the immediate benefits.
If you have 10 years left to pay on your current loan and you stretch out the payments into a 30-year loan, you will pay more in interest overall to borrow the money and be stuck with 20 extra years of mortgage payments, states Investopedia contributor Michele Lerner.
Lastly, you need to consider whether you have any plans of moving in the next few years or if you work in an industry that could require you to relocate without much advance notice. If it takes nearly six years to break even on the costs of refinancing, as was described in the first example, and if you move within that time period, then you will never make it to the point where you start enjoying an actual financial benefit from the refinancing.
Taking all these financial facts into consideration, it is clear that it is indeed possible to refinance your home too much. So before you get carried away by the tempting thought of a lower interest rate, talk to your lender to see what the costs and benefits would be in your particular situation. That talk may give you a much-needed reality check if the benefits just arent big enough to make the process worth it, or it just may turn out that refinancing is, in fact, a good financial move for you, and youll be glad you asked.