Should I refinance if I’m planning to move in two or three years?

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Reader question: “My husband and I will probably be moving in a couple of years, due to his military transfer. We currently have a mortgage with an interest rate that is much higher than current rates. I’d like to refinance to get a lower rate and reduce my monthly payments. But I’m not sure about the timing. Should we refinance if we are planning to move out in a couple of years?”

I can’t see how that would help you very much, unless the lender waived some or all of your closing costs. As a general rule, it doesn’t make sense to refinance a mortgage loan if you’re planning to move and sell the home in a couple of years. The reason is that the money you spend up front in closing costs will exceed what little amount you save over the next 24 – 36 months (with the lower rate and payments).

Your Closing Costs May Far Exceed Your Savings

Think of it this way. You might pay several thousand dollars in closing costs when you refinance your home. According to the Federal Reserve, “It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees. These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have.” But you will probably only save a few hundred dollars, if that, over the next couple of years. As a result, it is rarely wise to refinance when you are moving in a few years.

Granted, people refinance for different reasons. Some people use refinancing to switch from an adjustable-rate (ARM) loan to a more stable fixed mortgage, in order to avoid the uncertainty of future rate adjustments. Some homeowners use it to pull cash out of their homes, or to shorten the term of the loan for a faster payoff.

But the most common reason for refinancing is the same as your reason — to get a lower mortgage rate on the new loan, thereby reducing the monthly payments. In other words, most people do it to shrink their mortgage payments.

You might be able to accomplish those goals by refinancing. But you probably won’t reach your break-even point before you move out of the house in two or three years. As a result, you will likely spend more than you save.

Moving in Two Years Will Put You Short of the “Break-Even”

The break-even point is when your accumulated monthly savings (from the lower rate and payment) begin to surpass the amount paid up front in the form of closing costs. If you refinance now, but you are planning to move in a couple of years, the transaction probably won’t work out to your advantage.

The most likely scenario is that you will pay a few thousand dollars in closing costs, but only save a few hundred dollars (if that) in monthly payments by the time you have to move. If it truly works out that way, then it doesn’t make sense to refinance.

Read: Average cost to refinance a home

I was actually in your situation years ago, when I was in the military. Mortgage rates dropped sharply shortly after we bought a house and took on a new mortgage loan. I knew I was going to transfer again in three years. We wanted to refinance the home to take advantage of the lower rates and lower our payments. But by moving in less than three years, we would have wiped out any benefits the refi brought us. Our costs would have greatly exceeded our savings.

The lender we spoke to showed us a breakdown on paper. We would not have come close to reaching our break-even point. That’s why it usually doesn’t make sense to refinance when you are planning to move in a couple of years.

This is the kind of math you need to consider before making any decisions.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author