Does a Prior Mortgage Refinance Affect This One?

June 9, 2003, Revised December 1, 2006, July 6, 2007, March 12, 2009

In a market where declining interest rates have been accompanied by falling home values and tighter underwriting requirements, many borrowers who would like to refinance, cannot. Yet there are many borrowers who can refinance profitably, yet choose not to, for a variety of reasons that make no sense.

No Required Waiting Period on a Refinance

"How long do I have to wait before I can refinance again? I was told a year."

Not so. I have never heard of a law, regulation or loan contract that establishes such a limit.

You Don't Lose Past Principal Payments When You Refinance

"We refinanced 6 months ago to a fixed-rate loan for 30 years at 6.%. My loan officer just told me that he can give me a 5.375% rate with no closing costs. I’m tempted but I have already paid 5 months of the term and am reluctant to give that up. Am I right?"

No, you aren’t giving up anything. What you accomplished in the 5 months is a reduction in the loan balance equal to the 5 principal payments you made. If you refinance, it will be on this lower balance, so your savings remain intact.

It is true that if you refinance into another 30-year loan, you will be staring at 360 new payments. Lenders won’t write a loan with a term of 355 months. That is easily remedied, however, by making a small increase in your monthly payment. The increase is $3.09 for each $100,000 of loan amount, which I found using my mortgage calculator 2c. You might want to pay off even earlier by making the same payment at 5.375% that you were making at 6%. Calculator 2a, Extra Payments Calculator, indicates that if you do that, you will pay off in 326 months.

Note that while principal payments already made are retained, a refinance entails transaction costs that could be larger. Such costs must be considered in deciding whether the refinance is worth while. All my refinance calculators do this.

Past Refinance Costs Are Water Over the Dam

"I have an opportunity to refinance from 5.625% to 5.25%, but I paid $4500 to refinance just 8 months ago. If I refinance now, I will lose money on the previous refinance because the $4500 is more than my savings over 8 months. I would like to wait until my last refinance is in the black but I’m afraid that interest rates will go up and I’ll lose my chance. What do you recommend?"

I recommend you forget about your $4500 because it is gone. Use my calculator 3a, Refinancing an FRM, to determine whether or not it pays to refinance now.

You will notice that the calculator, before it can provide an answer, must be given information about a number of things, including the interest rates on your current and new loans, and the points and others costs of the new loan. But the costs you incurred on your previous refinance are not there, because they are irrelevant to whether you should refinance again.

A Refinance Need Not Extend the Life of Your Loan

“I have been paying on our 30-yr mortgage for 10 years. Early on, most of our payment went to interest, now a lot more goes to principal…If I refinance now, won’t that mean I’ll be starting from the beginning again with most of the payment going to interest?”

If you take another 30-year loan, yes, the amortization  process will start at the beginning, but that has nothing to do with whether or not it pays you to refinance. If you lower the rate and keep the balance unchanged on a new 30-year loan, your payments to principal will drop because extending the term to 30 years reduces the payment.

If you don’t want that to happen – if you want to pay off in 20 years, as you would have if you had not refinanced, take a 20-year loan. Or, take the 30 but continue making the payments you were making before the refinance. Then you will pay off in less than 20 years.

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