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If you had a dollar for every “Refinance Now!” or “Now is the time to refinance!” headline or advertisement, you wouldn’t have to refinance, because you’d be able to pay off your entire mortgage. But all hype aside, how often should you refinance, and when should you leave your current home loan alone?

According to sources like the US Census Bureau, the National Association of Realtors (NAR) and the Federal Housing Finance Agency (FHFA), the average homeowner in the US refinances about every four to five years and moves every five to seven years. How about you? Should you refinance or sit tight?

How much can you save by refinancing?

The biggest factor in your decision to refinance is probably the difference between today’s refinance rates and the rate you have on your current mortgage. Naturally, the bigger the difference, the more sense it makes to refi. How low do rates have to go? It depends on who you ask – a mortgage broker might tell you .50 percent lower than your current rate, while a conservative CPA might say 1.5 percent or more.

They could both be wrong.

To make a good refinancing decision, you need more information than just mortgage rates. You also need to know:

  • How much does the refinance cost? Costs eat into your savings or even eliminate it.
  • How long do you expect to keep the new loan? If you move every five years or so, does it make sense to refinance in year four?
  • Could refinancing meet needs other than your desire to lower your mortgage rate? Other goals might include replacing an adjustable rate mortgage with a fixed rate loan, paying off your loan faster, improving your cash flow, or trading equity for cash.
  • What is your tolerance for risk? Some loans offer much lower rates and payments, but they can eventually adjust, possibly wiping out the benefits of refinancing.

Life is not a cocktail party

Some people get caught up in refinancing fever – every time they see headlines like “Mortgage rates hit new low!” they call their lender and redo their home loan. Then they brag about it at social gatherings. But are bragging rights a good reason to refinance? Probably not.

Refinancing a mortgage always involves tradeoffs, as you’ll see from these examples, which are from the actual June 2015 rate sheet of a national lender. Here are the rules when comparing mortgages:

The tradeoff for a lower rate is higher cost.
A 30-year fixed rate mortgage at 3.95 percent costs about one point more than the same loan at 4.20 percent. And 3.75 percent costs three points more than 4.20 percent.

The tradeoff for a longer fixed term is higher cost.
For the same costs as a 30-year fixed rate mortgage at a 4.20 percent rate, you could get a 15-year fixed loan at 2.975 percent, or a 5/1 ARM (fixed for five years) at 2.475 percent!

The tradeoff for a lower payment is higher cost.
The payment for a $100,000 balance on a 30-year loan at four percent is $477 and total interest over the life of the loan is $71,870. The payment for a $100,000 balance at four percent with a 15-year term is $740, and the total interest paid is $33,144.

Refinancing restarts your clock.
If you stick with your original loan, you probably expect to pay off your home in 30 years. But if you refinance after five years, your payoff will take a total of 35 years (30 + 5). Do it again after another five years, and you make mortgage payments for 40 years (30 + 5 + 5). And so on. Unless you refinance to a shorter term or make additional payments, every refinance adds years to the amount of time it takes to pay off your home. This means that, even if you lower your mortgage rate, you could pay more interest over the life of your home loan.

The higher your costs, the longer it takes to break even. If you pay $200 a month less interest with your new loan and it costs $6,000 to refinance, it takes 30 months to recoup the cost of the refi and start saving. If you save only $50 a month, but your refinance only costs $500, you break even in only ten months. If you keep your home for three more years, the first loan puts $1,200 in your pocket (36 months * 200) – $6,000. The second loan gets you $1,300 (36 months * $50) – $500. The best refinance depends on how long you keep your loan.

Online mortgage calculators help you incorporate these factors and tradeoffs into your decision. Or ask a lender you trust to help you work through the numbers.

The no-brainer refinance

There is one time that you should always refinance if you can. Any time you can get a lower rate on the same loan you have at zero cost, go for it. You start saving immediately and have no break-even period. Want to stay on schedule with your repayment? Simply make extra principal payments. You’ll still pay your home off in 30 years (or whatever your original goal was). But you’ll pay less.

It’s all about you

Mortgage lenders don’t ask personal questions to be rude. It helps them choose mortgage products that meet your needs. If you plan to sell your home in three years, have some tolerance for risk, and want the lowest rate you can get, your lender will likely recommend a hybrid ARM because you’ll probably be long gone before the fixed rate expires. If you want to own your home free and clear before you retire, and you hate risk, you might love a 15-year fixed loan that gets you mortgage-free in half the time.

Buying a home involves your head and your heart. Refinancing, however, should involve only your head — numbers don’t lie.

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