Homeowners eager to lock in lower monthly mortgage payments have discovered serial refinancing, a practice last in vogue during the housing boom.
To keep up with falling rates, almost 2.2 million homeowners have refinanced their mortgages at least twice since 2009, according to data compiled for The Wall Street Journal by SMR Research, a mortgage-research firm in Hackettstown, N.J.
From 2006 through 2008, some 3.5 million homeowners refinanced at least twice.
There is little incentive to stop refinancing. Rates are still hovering near record lows, and lenders increasingly are offering to waive some or all of the closing costs for the borrower, making refinancing effectively free or at least very cheap.
Dean Spalding, a financial-services executive in Louisville, Ky., has refinanced his 15-year mortgage which now has a balance of roughly $350,000 four times since 2009, including twice in the past 12 months. Over this period, his rate has dropped from 4.25% to 2.875%. After his last refi, he says, his monthly mortgage payment dropped by about $150.
"It has been a no-brainer," says Mr. Spalding, who used First Commonwealth Mortgage, a mortgage broker based in Louisville.
The last time homeowners were so eager to refinance, it was a more expensive proposition. At the height of the housing boom, 86% of borrowers who refinanced took out cash and ended up with a higher loan amount, according to Freddie Mac.
To do so, they typically agreed to pay thousands of dollars in closing costs and often a steep prepayment penalty, a fee levied on those who paid off a substantial portion or all of a mortgage typically in less than four years.
Those costs made refinancing prudent only for those who could get a significantly better rate often two percentage points or more, financial advisers said and expected to stay in their houses long enough for the monthly savings to offset the upfront costs.
Today, lenders say, some borrowers are refinancing when rates drop as little as three-eighths of a percentage point.
"The traditional rules of refinancing are no longer in play," says Bruce Thielen, a vice president at NASB Financial.
So what is the catch? In exchange for waiving closing costs, lenders charge a slightly higher interest rate.
The numbers vary by lender and type of mortgage, but in order for 1% to 1.75% of the loan amount to be applied toward closing costs, a lender typically raises the rate by 0.25 percentage point or more, says Mark Goldman, a senior loan officer at C2 Financial, a mortgage brokerage based in San Diego.
This trade-off entices homeowners to refinance, bringing much-needed business to lenders at a time when a still-sluggish housing market has hurt the market for new mortgages.
For many borrowers, it means a lower rate than they're currently paying and no closing costs. They no longer have to commit to a home for a specific period to recoup their expenses, which means they can sell if they need to, without having to eat the refinancing costs.
Wiping out these costs also encourages serial refinancers to come back to refinance again when rates drop by even a small amount, especially for borrowers with large mortgages, says John Shunnarah, CEO of First Commonwealth Mortgage, where he estimates 30% of clients have refinanced two or more times since 2009.
There are drawbacks to this strategy. For borrowers who plan to stay in their homes for a while, the higher rate can eventually outstrip the savings in closing costs, says Michael Moskowitz, president of Equity Now, a New York-based mortgage lender. In those cases, it would be better to pay the closing costs and get a lower rate.
To be sure, refinancing isn't an option for every homeowner. Some borrowers with poor credit scores might not be able to obtain a rate that's low enough to make refinancing viable. Homeowners who owe more on their mortgage than their home is worth can try the federal government's Home Affordable Refinance Program if they qualify.
Potential refinancers who are unsure how long they will keep the new mortgage should favor the lender willing to waive the most in closing costs while raising their rate by the least amount, experts say. That will allow them to stay in the home for a longer period before the mortgage becomes more expensive than if they had chosen to pay the closing costs upfront and get a lower rate.
Separately, borrowers who select a 30-year term each time they refinance will be extending the total repayment period, says Keith Gumbinger, a vice president at HSH.com, a mortgage-info website. They might also pay more in interest overall.
For many homeowners, though, refinancing pays off. Anna Pembedjian, a public-policy adviser who lives in Glendale, Calif., refinanced her mortgage twice in the past three years. Her lender offered to waive about half of her closing costs both times, which she says made the decision an easy one.