Timing is everything. This is especially true for refinancing mortgages whose decrease in rates can spell a difference in savings (monthly mortgage payments). And there is no limit as to how many times you can refinance your existing mortgage. There is no rule or regulation governing the frequency for refinancing. So if you have refinanced your mortgage once, you can do it again and again.
Doing Refinance Right, the Nth Time
How often can you refinance again? It depends. From your end, you can come up with a myriad of reasons why you need to refinance. Common examples would be to consolidate debt (cash-out refinance), to switch to a new term/rate (rate-and-term refinance), and to avoid foreclosure (short refinance). »Want to know more about your refinancing options?»
Lest you forget that when you refinance, you reset your “mortgage” clock and start repaying a new loan. This leads to considerations or even questions you should ask yourself when you feel like refinancing again.
- Savings. This is a two-fold topic. A primary consideration is “How much will I save if I refinance?” This entails looking at your monthly payments and the interest you’d have to pay when you reset your loan term. The second point is: “Will refinancing help me save in some other ways?” This refers to aspects of your loan that you think is burdensome and the only way to get rid of them is to refinance into a new loan.
- Costs. When you refinance, you have to incur costs relating to getting the mortgage and maintaining the home in the form of insurance and taxes. You have the option to do defer paying closings costs through no-cost refinance or do a cash-in refinance where you pay the closing costs upfront to get a lower rate.
- Stay Length. Usually, it takes more than five years for you to realize gains from refinancing. And if you plan to move out before that, you are likely incurring costs and not saving anything.
- Qualification. Lenders would still ask you to meet their requirements like credit, equity or loan-to-value ratio, and appraisals with some lenders requiring a specific timeframe between such.
- Alternatives. A refinance entails a new set of costs that can be expensive. There may be cost-effective alternatives like getting a home equity line of credit, recasting the loan or do a refinancing under the Home Affordable Refinance Program® (HARP®). FHA Streamline Refinance and USDA Streamline Refinance also do not require appraisals and a lot of paperwork to lessen the cost.
- Loan Term. If you refinance into a longer loan, you’d pay more on interest and less on principal. If you refinance into a shorter term loan, you’d pay more on the principal and less on the interest. Also, consider how many years you are into paying the loan to determine if it’s financially sound to start over again.
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Refinancing and More Things to Ponder
Practical sense would tell you that refinancing should be about saving exceeding costs. Again and again, you lock in a lower rate to make your mortgage payments easier and more affordable. But they say, you can never have too much of a good thing. To avoid turning refinance into a nightmare, here are possible scenarios to think about:
- You refinance to save, right? So to maximize savings, wait for rates to drop, like near-historic levels to ensure that what you can save can’t be taken by fees, costs, and penalties that come with the new loan.
- You think about interest payments. It’s a battle between locking in a lower rate and paying for (more) interest as your loan gets extended. Say, you refinanced a 30-year mortgage twice in every five years, you just added 10 years into your loan life.
- You think of its effect on your credit. Multiple credit inquiries relating to mortgage, auto or student loans can lower your credit to a certain extent. But having a huge number of credit inquiries might mean greater risk, that is consumers with six or more inquiries on their credit reports are likely to file for bankruptcy.
- You think of your equity. If you refinanced too often, especially when you do a cash-out refinance, this can slow down the buildup of your equity. If factors such as low home prices are involved, you might find it difficult to sell your home. It could mean trouble if your home value drops below your mortgage balance.
- You think of your refinancing prospect. And if you have an underwater mortgage, as noted above, it could preclude you from getting meaningful refinancing opportunities.
Refinancing is pretty much a good thing if you know how to use the benefits it brings to your advantage. Hear what lenders have to say about your refinancing plans. »Shop and compare mortgage rates today!»
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.