After only four years, some factors come into play that could make refinancing again a smart move. While there is technically no limit to how often you can refinance your home mortgage, each refi comes with a price tag, and you are considering this to save money, right? People don't refi yearly.
Four years is the earliest sweet spot for reasons we will cover here.
Your Previous Closing Costs Are Probably Paid For
Closing costs are typically 2%-5% of the financed amount, and it takes a while to recoup that money. You get back a little every month that you make a lower payment thanks to your refi. One month, it happens: You break even. The cost of the refi has been offset by months of making a lower payment. From now on, you enjoy pure savings.
Every loan with costs of its own (origination fee, closing costs, discount points) will have its own breakeven point, because it depends on how much money the loan saved you. The formula is basic:
Loan Costs ÷ Monthly Savings = Breakeven Point
Example: All the costs associated with the refinance are $7,000 and your new lower payment saves you $215 every month. Divide the costs by the savings, and you find that it will take about 32 months to break even.
$7,000 ÷ $215 = 32.5
What's a good breakeven point for a mortgage refinance? Experts say 30 months, or 2½ years. Some people will break even sooner, others later.
Calculate your breakeven point when considering any refinance, because not breaking even by 30-35 months or so (under three years) probably means the closing costs are too high and the savings too little. In that case, you should keep looking for better mortgage refinance options.
Rates Then Might Have Been Higher Than Rates Now
Four years may not sound like much time. A four-year-old shirt is still a new shirt in our book. But it's enough time for mortage interest rates to swing widely.
Sure, we've moved through a period of historically low rates to find ourselves somewhere else, but low is relative. It doesn't matter how low today's rates are. What matters is: Are they lower than the rate on your current mortgage?
A difference of only 1% can be sufficient to make refinancing worthwhile.
Don't Add Years
If you have 19 years left on your mortgage, refinance for 19 years to match. Ask the lender to adjust your term. Adding years would be going backward.
Four years is too long to postpone getting a suspicious mole examined but just right for exploring another mortgage refinance.
Your ARM Is Probably Scheduled to Adjust Next Year
Refinancing could be a financially sound way to dodge the impending rate adjustment of an adjustable-rate mortgage.
The most common adjustable-rate mortgage is a 5/1 ARM. This means you will have an initial period of five years (the “5”) when the interest rate is fixed. After five years, you can expect the ARM to adjust once a year (the “1”).
“With an ARM, it's scary to know that your monthly payments could go up. Life is unpredictable enough without having a question mark looming over your mortgage payments because of the unpredictable nature of an ARM.”—Three Good Reasons for a Cash-Out Refinance
You wouldn't mind an automatic adjustment to prevailing market levels if the percentages were dropping, as they were before and during the pandemic. But forecasters today see only higher numbers on the horizon compared to four or five years ago.
You Can Leverage Your Increased Equity
Home values surged over the past few years, so now you own more home than you otherwise would after a four-year period. This should make you more attractive to lenders when you refinance and will improve your chances of securing a lower rate than you otherwise could.
Your increased equity also might mean that this time around, you can drop private mortgage insurance (if it hasn't been dropped already). Sometimes called lender's insurance, PMI is usually required when you make a down payment less than 20%. It is insurance you pay to cover the lender, not yourself. In the event that you default on your mortgage, the lender can collect insurance to cover some or all of its loss.
Many homebuyers can't swing a down payment as large as 20%. They will only reach that share of equity in time. But thanks to rapidly increasing home values, In just a few years you might have sprinted across the key 20% line.
It comes down to owing versus owning.
When you took out the first mortgage, let's say your home was priced at $325,000 and you owed 88% on it because you'd put down 12%. A down payment represents how much of the home you own on day one. After four years you still owe around $265,000 but the home is reappraised at $370,000. Suddenly (if four years can be called sudden), the share you owe the bank has fallen to 72% and you own 28%.
As soon as you attain 20% equity in your home, you can ask a lender to cancel your PMI, although you will have to pay for the reappraisal. Once you attain 22% equity in your home, by law the lender must cancel your PMI.
Another tremendous bonus of rapidly growing equity is that it opens the door for you to convert some to cash. You can quickly find and compare your best cash-out refinance options at Lendgo.
Mainly because you want to cover the previous loan's closing costs before refinancing again, four years is the earliest sweet spot. Your savings from the last refi has covered the cost of getting that loan off the ground, and now you can consider another refi to take advantage of your increased equity and a beneficial change in interest rates compared to when you took out the last loan. Furthermore, if you are currently in an adjustable-rate mortgage, refinancing at the four-year mark is a chance to dodge the looming rate increase.