Back-to-Back Refinancing: Should You Do It Again?

When refinance mortgage rates dropped to an average of 5.5% in 2009, few thought they'd go lower. In fact, most analysts predicted increases to 6% once the Federal Reserve stopped buying mortgage-backed securities in March 2010.

In a surprise turn resulting from continued shakiness of the global economy, mortgage rates reached lifetime lows last week.

If you took advantage of last year's low mortgage rates, you may be wondering (while kicking yourself) whether you should consider refinancing yet again. Here's what you need to know to make that decision.

When Is it Silly to Refinance a Mortgage?

Whenever you refinance a mortgage, you restart the clock on paying off your home loan. If you've been paying on a mortgage for five years and you get another 30-year fixed-rate loan, it will now take you 35 years in all to pay that sucker off--with all the interest rate charges that implies. So you don't want to refinance indiscriminately.

But of course there's an upside to refinancing, too. You get more favorable mortgage terms and/or a lower mortgage rate. Understand that there are always costs involved; it takes time for monthly savings to offset those costs. If you aren't planning on staying in your home long enough to reach that breakeven point, the refinance isn't worth it. Make sure that your refinance meshes with your plans for retaining the property.

Another consideration that many fail to note is that some of what's called "savings" when you refinance is not true cost savings. Your payment gets lower any time you stretch the remaining balance out over a new term, even if your rate didn't drop at all!

Guide to Lenders Has a Smarter Mortgage Calculator

You can take all of those considerations into account with the GuidetoLenders.com refinance mortgage calculator. You'll need some information about your current mortgage, probably a little more than "dumber" calculators require. Get your mortgage balance, the number of years and months you've been paying on your home loan, the interest rate on your current loan, and estimate the number of years you wish to keep the home. Put in a new interest rate and the estimated refinance cost (you may want to get some refinance mortgage lenders' quotes first).

The refinance calculator takes a couple of looks at your mortgage and helps you make a clear decision:

• First, it determines the reduction in mortgage payment that would be created by a refinance. Keep in mind that the lower payment is generated by lowering the mortgage interest rate but also stretching out the loan balance over a brand new term.
• The calculator determines the total amount you'd expect to save as long as you plan to retain the property.
• Finally, the calculator offsets these savings with the costs of the new home loan and also the decrease in principal reduction that will take place when you restart your mortgage payoff.

So this refi calculator accounts for all the pros and cons of refinancing. You'll get a result, positive or negative, that should tell you if refinancing is smart or silly.

Principal Reduction Strategy

If you want to refinance an old 30-year fixed-rate mortgage to another 30-year loan but don't want to extend your mortgage payoff term, it's easy to figure out how much you'd need to pay each month and how much you'd save.

If you've been paying on your $300,000 home loan for 5 years at 6%, you'd have 25 years to go before it's paid off. Suppose you could refinance the remaining $279,163 balance at 3.5% on a 5/1 hybrid adjustable rate mortgage for 1 point. The calculator determines that you'd pay $1,254 a month and save $32,705 in payments over five years, in addition to $656 in increased principal reduction over that period, offset by fees of $2,792. Total savings: $30,570.

But you could input a new term of 25 years instead of 30 years, and your monthly payment would be $1,398. The savings in monthly payments drops to $24,066 because you're effectively making extra principal payments each month to get your mortgage paid off in 25 years (30 total, counting the old home loan) instead of 30 (35 total, counting the old home loan). But the amount of principal reduction increases to a positive $10,082, and your total savings increases to $31,357.

Replacing a 30-year Loan with a 15-year Loan

Can you tell how much reducing your 30-year home loan to a 15-year term will save you in the long haul, even if your monthly payment increases? Of course you can! While the payment savings will actually be negative, the much higher principal reduction offsets this. And keep in mind that 15-year mortgage rates are generally half a point lower than 30-year rates.

A smarter calculator can tell you how retaining your home for longer or shorter terms, paying more or less for refinancing, and your choice of mortgage product affects your savings.

You may well discover that refinancing your mortgage makes sense today--even if you just did it last year.