Don’t Fear the Refi: Serial Refinancing Can Help You Save Part 2
By Joseph Kelly
With a true no closing cost loan, you can use the money you get back from the investor towards the closing costs. Therefore, nothing gets wrapped back into the loan. There are clients who have refinanced every year for the past ten years, and they have never paid closing costs.
Starting Over: One of the dangers with serial refinancing is that every time you refinance, you start the clock over on a new 30-year loan, essentially pushing your debt-free date out further into the future. Well, the simple solution to that is to continue with the same payment after you refinance. Prepayment penalties on 30-year loans have virtually disappeared, and loan servicers make it easy to pay extra toward your principal balance.
Also, just because you got a new 30-year loan doesn’t mean that you have to take the full thirty years to pay it back. Your loan officer can run an “amortization schedule” to tell you what payment you would need to make in order to pay the loan off in any given length of time, for example 20 years, 25 years, etc.
Of course, if you have high-rate credit card debt, it makes more sense to pay that off first. Or you may want to use your increased cash flow to increase your emergency fund or retirement savings, depending on your financial situation and goals.
To Refinance Into a Shorter Term or Not: Many borrowers are taking advantage of low rates in order to refinance into a shorter term loan. Typically, that would mean going from a 30-year fixed rate to a 15-year fixed rate, although there are 20 and 25-year loans available as well. While you will get a lower rate on a shorter term loan, your payment will likely increase as well.
Sometimes it makes sense to get a longer-term loan and then pay it off faster. You can always take a 30-year loan and, by paying extra, turn it into a 15 or 20-year loan. Then if a negative financial event happens, like losing your job or a family illness, you will have the flexibility of a lower payment if you need it.
Will rates go lower again? It’s hard to predict what will happen this year. We may be at the low-end of the interest rate cycle, or rates may approach 2% this year. Either way, serial refinancing can give you the advantage of low rates when you can get them, and get out of debt faster.
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