Refinancing a mortgage can help make your monthly housing payments a lot more affordable. But how often can, or should, you refinance your home loan?
What is mortgage refinancing?
When you refinance any type of loan, including a mortgage, you effectively trade it in for another loan. Your current loan balance is paid off by the new loan, and then you repay that new loan over time.
Why refinance a mortgage?
The main purpose of refinancing a mortgage is to lock in a lower interest rate on your loan, thereby lowering your monthly mortgage payments in the process. You can also refinance if you have an adjustable rate mortgage and want to swap that for the stability of a fixed-rate loan.
Furthermore, if you need money, whether to renovate or pay off credit card debt, you can opt for a cash-out refinance, which gives you a new loan that exceeds the amount you owe on your home. You can then use that excess cash to pay for whatever it is you need; as in the case of a home equity loan, you're not limited to home improvements or repairs.
How many times can you refinance a mortgage?
Technically, there's no limit on the number of times you can refinance a mortgage. But in certain cases, you may be subject to a waiting period between refinances.
More so than anything else, though, you’ll need to make sure refinancing your mortgage repeatedly makes sense. If your new interest rate isn't considerably better than your current rate, it may not be a smart move. The reason? There are closing costs associated with refinancing that can equal 3% to 6% of your new loan amount. Therefore, you'll need to make sure your monthly savings under that loan justify that expense.
As a general rule of thumb, you should look for an interest rate that's at least 1% lower than what you're currently paying. But depending on what your closing costs look like, you may need to aim for even more savings on your interest rate -- like 2%. Once you get some quotes for a mortgage refinance, it pays to use a refinance calculator like this one to see if it makes sense to go that route.
With all of that in mind, it can make sense to refinance a mortgage more than once, but again, you'll need financial justification to compensate for the closing costs you'll contend with. Here are some situations where you may want to refinance more than once:
- Your credit score has improved a lot since you last refinanced, and you're now eligible for an even more competitive mortgage interest rate.
- You want to get rid of private mortgage insurance, or PMI, which you can do if your home value has increased a lot since you last refinanced and you'll be able to take out a new mortgage with a balance of less than 80% of your home's worth.
- Interest rates have dropped substantially on the whole.
- You want to increase the term of your loan because you're having trouble keeping up with your current monthly payments.
- You need money to fix your home or meet other financial goals and are looking at a cash-out refinance.
When might you have to wait to refinance a mortgage?
Though you're allowed to refinance a mortgage numerous times, if you do a cash-out refinance, you may be forced to wait six months from one refinance to the next. Also, if you have an FHA or VA loan, you may need to wait six months to refinance as well.
How do you refinance a mortgage?
Refinancing a mortgage is similar to applying for a new one in the first place. First, you'll need to make sure you're in a solid enough financial position to qualify for a refinance. That means having:
- Good credit.
- A relatively low debt-to-income ratio.
- Steady income.
- A decent amount of home equity (generally 20% if you want to snag the best refinance rates).
Next, you'll need to shop around. Contact multiple lenders, get quotes, and see which are the most competitive. Your best bet is generally to go with the lowest rate you're given.
From there, you'll need to present whatever financial documentation your new lender requires. That could include:
- Current mortgage statements.
- Bank statements.
- Tax returns.
- Pay stubs.
- A letter of employment from the company you work for.
- A list of your current non-mortgage debts.
After that, your home will generally need to go through the appraisal process before your refinance can be completed. The purpose of an appraisal is to get a sense of your home's current market value, and it protects lenders from giving you too much money to borrow. Generally, this is a cost you'll need to absorb yourself (as part of your closing costs), which is why it's not always advantageous to refinance repeatedly.
As long as your appraisal goes smoothly, you'll wait for your mortgage lender to get its ducks in a row, and then you'll close on that new mortgage just as you closed on your original home loan.
What are some alternatives to refinancing?
Though refinancing can be a good solution for snagging a lower monthly payment on your mortgage, due to the costs involved, a cash-out refinance is not always the best option if you simply need money. If that's the scenario you're in, a better bet could be to borrow against the equity you've built in your home -- namely, by taking out a home equity loan or applying for a home equity line of credit.
Another option, if your credit is strong, is to take out a personal loan. The rate you qualify for with a personal loan may be fairly competitive, and that way, you get to avoid the risks associated with borrowing against your home (such as potentially losing that home to foreclosure, which could happen if you fall behind on repaying a home equity loan or line of credit).
How many times should you refinance?
It generally doesn't make sense to refinance every time your credit score climbs a few points or interest rates go down slightly. But in the course of owning your home, it could make sense to refinance your mortgage more than once. If you opt to do so, weigh your potential savings against the costs of getting a new loan, and make sure you’re able to come out ahead financially.
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