New Paper Suggests Optimal Time to Refinance

Tom Kerr writes:

Refinancing is often a smart option, because moving out of an expensive loan into a cheaper one can provide substantial savings, both in the near term as well as over the long haul. But economists at Harvard and Brown universities, working with the National Bureau of Economic Research, recently concluded a study that suggests that homeowners may want to exercise more patience before refinancing.

Each time that you refinance, there are costs involved. These range from attorney's fees and appraisals, to lender's commissions and the price of shipping documents back and forth between the lender and the underwriter. While many of these expenses are tiny compared to the long-term savings that come with refinancing, they're still an important factor to consider. Some people refinance every chance they get, even though each time they incur those fees. This seems to be the crux of the specific problem revealed by the economic study, which indicates that as many as 30 percent of homeowners could save more money by refinancing less frequently. In other words, people are too eager to refinance every time rates drop because they're afraid of missing the chance before they go back up again. Then, if rates continue to drop, they refinance again. With rates steadily declining, and refinance fees constant, this can quickly undermine the overall goal of saving money.