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I'm about one year into a 30-year fixed-rate mortgage, and while visiting my bank's website, I noticed that their rates for an equivalent mortgage are about 0.5% lower now than what I am paying, which is a tremendous amount of money over the life of the mortgage. A bit of online shopping shows I can do slightly better than that, even. If I refinanced, I'd be doing it just for the lower interest rate, not to take out any equity.

What are the downsides to refinancing? Are there any pitfalls to watch out for?

I noticed that some banks offer zero fee refinancing; does this gen mean the total cost of refinancing would be zero, or are there payments that are not typically included in "fees" (closing costs perhaps?)?

(In case it matters, I am not paying PMI any more)

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    What are the downsides to refinancing? The costs of refinancing. or are there payments that are not typically included in "fees" (closing costs perhaps?)? Maybe. Salesmen love to hide money in the fine print.
    – RonJohn
    Jan 7, 2020 at 0:49
  • Half a percent saves you $32/month per $100k borrowed. Honestly not worth the hassle. I would consider refinancing once the monthly savings hit about $100 but even then I might hold out for a lower interest rate since I wouldn't want to refinance a second time. I hear that some countries are going into negative mortgage rates so I'm holding out for that situation. Put the mortgage on auto-pay and move along with your life. If saving .5% really makes such a significant difference in your ability to pay the mortgage then I would be worried you might be house-poor.
    – MonkeyZeus
    Jan 7, 2020 at 19:01
  • @MonkeyZeus it's a ~$300k mortgage, so that 0.5% is just about ~$100/month. My mortgage payment is well within my budget as-is, this is really just about saving money long-term.
    – asgallant
    Jan 7, 2020 at 22:38
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    Sounds like it might be worth it then. Just make sure that you plan to live in the house long enough to at least break even on the cost of refinancing.
    – MonkeyZeus
    Jan 8, 2020 at 13:52

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What are the downsides to refinancing?

The downside is you pay closing costs upfront. The interest you save needs to make up for the closing costs within a reasonable time frame (4-5 years is a common rule of thumb). So if you pay $5,000 in closing costs and save $100 a month in interest, in 50 months you'll have made up the closing costs in interest savings.

Are there any pitfalls to watch out for?

Look at the APR of the loan. This tells you the effective interest rate you pay when accounting for closing costs and "points" (prepaid interest in exchange for a lower rate). That's the most effective way to compare mortgages across lenders.

I noticed that some banks offer zero fee refinancing; does this gen mean the total cost of refinancing would be zero, or are there payments that are not typically included in "fees" (closing costs perhaps?)?

This may be how the banks position a loan that has "reverse points" added on. What that means is that you get some cash back at closing in exchange for a higher interest rate. Or, they may increase the principal beyond what you owe now and "cash out" some equity to cover closing costs.

With no points involved, you should expect to pay somewhere between 2 to 5 % in various closing costs, spread across various actual costs (appraisals, title work, etc.) and the bank's "origination fee" (their payment for actually making the loan). As others have noted, it generally takes a drop of about 1% in the interest rate in order to make up for the closing costs in the first 4 or 5 years of the loan. Any longer than that, and you risk moving before your break-even point.

Another way to save interest in the long run is to reduce the tenor of the mortgage from 30 years to 15 years. With a drop in interest rate, your payment may still be affordable, and you'll save much more interest in the long run (as well as a shorter break-even time).

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  • I figured there would be a gotcha somewhere in there, otherwise why not refinance every time interest rates drop?
    – asgallant
    Jan 7, 2020 at 2:38
  • @asgallant since you mentioned "zero fee" loans, it's worth noting that you need to read the fine print. Often, this just means that the bank doesn't charge an origination fee or an application fee. There are often other "fees" that you are still responsible for at closing - i.e. taxes or title fees, and so on.
    – dwizum
    Jan 7, 2020 at 16:12
  • @asgallant If you have your interest rate fix for X years, you might pay a refinance fee which is up to the saved interest until the end of the X years. In this case, refinance is a zero sum game. If it is cheaper, it might be useful to refinance.
    – glglgl
    Jan 24, 2021 at 11:49
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Different sources will give you different answers to this question, but typical recommendations are that you want to drop the interest rate by 1% or more to justify the closing costs involved in refinancing.

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An interest reduction of 0.5 % does not sound like enough for me. I used a payout of 3 years maximum, That is; the total monthly savings in a maximum of 3 years must exceed the cost of the new mortgage. One thing to consider is the average home mortgage lasts about 7 years until the house is sold. I have refinanced about 10 times ; I have had several houses and one had a "Jimmy Carter" mortgage at 17 % ( I was able to get it down to 17 buying it down with points provided by my employer). I got 2 or 3 refinancings on that house in about 5 yr.

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