Ask The Expert: Should I Refinance Again?

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Question: I refinanced my mortgage three years ago, and the interest rates dropped more. Should I refinance again?

-Dave S., New York

The Investing Answer: Refinancing can be addictive, especially when you see rates that are much lower than the last time you refinanced. Whether you should take the plunge depends on the answers to three questions:

1. Are current rates really at their lowest in the near future?

You're not going to feel great about refinancing your mortgage if rates increased from the last time you checked or they will go down in the near future.

"Mortgage rates recently ticked up to the highest they have been in about two years, resulting from the 'taper tantrum' in response to the Fed's pronouncements," says Lincoln Financial Advisors certified financial planner Ray Benton. "Obviously, this has spoiled the refinancing plans of many homeowners and, for the time being, the opportunity may have passed."

Depending on the rate you refinanced at last time, a 4.39% home loan might be a good deal. If you refinanced three years ago, however, unless your credit was not so great, you probably already have a rate like this.

The good news is rates may decrease again. "Some experts (including Bill Gross at PIMCO and Jeffrey Gundlach at Doubleline Capital) think that the tantrum will subside and that rates will be lower by the end of the year," says Benton.

2. Will you have time to reap the interest rate benefits?

Don't refinance if you don't have time before you plan to sell your home to gain back the money you spent on refinancing. "When or if the time comes, consider how long you plan to remain in the house, and be sure there will be time to recover closing costs and benefit from the new loan (resulting from the lower payments)," says Barton. "For example, if the new rate drops your payment by $150 per month and the closing costs and/or points paid out of pocket are $3,600, it will take only 24 months to recover your costs."

3. Is your mortgage going to start over?

Are you ready for a brand new 30-year mortgage? Not exactly the birthday present you were hoping for, is it? The truth is regardless of the interest rate, you have to decide if the rate difference is worth starting over.

That is unless you opt for a loan modification where your interest rate is reduced without the time clock restarting.

What's your next step? Refinancing is not about rate alone. It's also about fees and timing. If you really want to refinance your mortgage to get a lower rate, do it. But ask any bank you're considering for your new mortgage to spell out all the fees on a disclosure form. Analyze it carefully. And above all, since rates are at "near" historic lows, ask yourself if you will kick yourself for not waiting just a bit longer.

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