This is an article we found on a mortgage company website. But does it make sense for anyone other than the loan officer racking up transactions?  Let's take a look!

When rates fall steadily, refinancing may make sense even if you have done so once already. Bob and Michelle Barbo of Kirkland, WA refinanced twice within three months in 1998. In October, they trimmed the rate on their 30-year fixed mortgage by a full point -- from 9.13% to 8.13% -- for a monthly savings of $252.59.

To exploit continued decline in rates, the Barbos refinanced again in December. Their new 30-year fixed mortgage is at 7.375%, lopping another $125.19 off their monthly bill. Since the couple had chosen a no cost refinancing each time, their total out of pocket expenses came to just $400 in appraisal fees. So by the time you read this, they will already have recouped their up front costs. "Now we can use the savings to build up a cash emergency fund," says Bob.

SmartRateSearch asked the question, did the first refinance make financial sense?  Let's see.

Due to the fact that the Barbos' original loan amount, current balance and number of months already paid on their current mortgage is not stated in the article we will use an example.

Lets say the Barbo family had originally received a $250,000 mortgage and they had paid 5 years on that mortgage resulting in a current balance of $239,941.  As stated in the article they had a 30 year term and refinanced to a new 30 year term. Their current interest rate was 9.13%. This would equate to a principal & Interest payment on their current mortgage of $2,034.99.  The article states that the Barbo family used a no closing cost program so we will assume a new loan amount of  $239,941. The new payment with a 8.13% rate and the new 30 year term resulted in a payment of $1,782.40.

In this example the Barbo family realizes a $252.59 monthly payment savings. That savings multiplied over the course of the 30 year term or 360 payments equals a $90,932 savings over the life of the loan. This seems like a great deal, or is it?

By calculating the total remaining payments on the current mortgage ($2034.99 pmt x 300 remaining payments = $610,497 in remaining payments) If we do the same equation for the new 30 year mortgage it looks like this. ($1,782.40 pmt x 360 new payments = $641,664 in new payments). Thank you Mr. Loan Officer, you just cost the Barbo family $31,167 over the life of their new loan!

How did this happen?  The loan officer simply failed to tell the Barbo family that although they are saving $252.59 per month, they will be making that new lower payment for additional 5 years! 

So this begs the question, does the second refinance make sense?  Lets use the same equations and see.

We will assume that the Barbo family has not paid down the balance of their new mortgage in the last 2 months since their last refinance. 

Their new loan amount for the second refinance is $239,941 with a new interest rate of 7.375% on another 30 year term.  The new payment is $1,657.21 which results in a monthly payment savings as compare to the original loan of $377.78 monthly. Over the life of the loan the Barbo family would see $136,000 in payments savings.

As we recall from the first example the Barbo family had $610,497 in remaining payments on their original mortgage.  The new total of payments for the second refinance is ($1,657.21 pmt x 360 months = $596,595 in total new payments)  This second refinance scenario actually generates the Barbo family a profit of $13,901 over the term of the new 30 year loan.

The second refinance makes more financial sense than the first, but what should the Barbo family have asked the loan officer to do that would have made both of these transactions worthwhile?

Very simply, the Barbo's should have requested a mortgage term of 25 years to match their current remaining term.  The new 25 year mortgage payment of $1872.61 would have resulted in a $162.38 monthly savings without increasing the total payments on the mortgage. The second refinance would then make even more sense!