Refi after One Year?

Typically people don’t refinance a mortgage for several years after receiving the original one. It’s usually just too expensive. Yet a recent article on the Wall Street Journal website said that since rates have dropped so dramatically low in the past 12 months even those who bought homes or refinanced their mortgages in the past year should consider refinancing again.

The average interest rate on a 30-year fixed rate mortgage loan has averaged below 4.25 percent for almost a month now – a rate unheard of in the latest half century. Last year at this time, the average rate was right around 5 percent.

So why should that difference in rates be enough to spur recent buyers into refinancing? Article author Amy Hoak gave the example of a borrower who had gotten a 30-year fixed-rate loan last year at 5 percent on a $200,000 mortgage. By refinancing into a 4.25 percent loan today, the borrower would save about $100 a month, but it would take about three and a half years to recoup the loan closing costs. Yet if people bought last year, knowing the market conditions, they are presumably planning to stay in their homes at least that long.

What is interesting about trying to market refis to recent borrowers is that, in general, if they bought in the past year, with all the stringent requirements and ratios being enforced, they likely bought at a price and with a rate that made for a fairly affordable payment. So a savings of $100 a month will probably not be enough to bring them back to the mortgage table with all of its details and paperwork, not to mention its costs.

And if they bought or refi-ed recently, they most likely already paid a significant chunk of change within the past year. Many borrowers simply won’t have that kind of cash to plunk down again right now. I tend to agree with Greg McBride, senior financial analyst for, who was quoted in the article as saying,

“There are many homeowners for sure who don’t have the tolerance for paying two sets of closing costs, because it’s a lot of money out of pocket now for a modest monthly savings that will take some time to completely recoup.”

So while some borrowers may indeed look to refinance at today’s record low rates before they start to rise again next year (as predicted by the Mortgage Bankers Association), chances are the majority of those who recently signed a loan will not consider the savings to be worth the cost.

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