How Often Can You Refinance Your Home?
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A mortgage refinance might put cash back in your pocket each month or save you thousands in interest over the life of your loan. But just how often can you refinance your home, especially if you’ve already done so recently?
There are no refinance rules that restrict how often you can refinance, but refinancing multiple times can be costly and come with steep consequences if you don’t plan carefully.
How often can you refinance your home?
You can refinance a mortgage as often as you’d like, provided that you meet your lender’s eligibility requirements. You’ll also need to ensure you can afford to pay refinance closing costs, which can range from 2% to 6% of your new loan amount.
While there are generally no mortgage refinance restrictions on how frequently you can replace your home loan, your lender may have a “seasoning” requirement in place. This gives you a timeframe for how old your existing mortgage should be before refinancing.
Why homeowners refinance multiple times
Homeowners might refinance their home multiple times for a variety of reasons. Why and when to refi depends on each homeowner’s financial circumstances and goals. Let’s look at a few reasons to consider a mortgage refinance:
- Tapping home equity. You may need cash to consolidate other debt, pay for college tuition or complete a home improvement project. A cash-out refinance allows you to tap into your available home equity with a loan amount larger than what you owe, then taking the difference between your new and old mortgage in cash to use as you see fit.
- Reducing interest costs. If your income is significantly higher now than it was when you first closed on your home purchase, you may benefit from refinancing into a shorter-term mortgage. Your monthly mortgage payments will go up, but you can expect to reduce the interest you pay over time.
- Lowering monthly payments. If you’d like to lock in a lower mortgage rate while also taking advantage of a lower monthly payment amount, you could refinance into a longer-term loan, such as switching from a 15-year to a 30-year mortgage.
Drawbacks of refinancing your mortgage often
A mortgage refinance involves more than just signing a few documents, (potentially) switching lenders and going about your day. While a refinance may help you save money, there can be several pitfalls associated with refinancing too often.
Costs canceling out savings
Refinancing comes with another set of closing costs, and those expenses might cancel out the benefits of a refi, depending on your long-term plans for your home. To ensure you’ll actually save money over time and recover your refinance costs, calculate your break-even point.
Let’s say you’ll pay $5,500 in closing costs and fees for a refinance that will save you $150 each month on your mortgage payments. You’d divide $5,500 by $150 to calculate how many months it would take you to break even, which would be 37 months, or about three years, in this case.
However, if you don’t plan to stay in your home for more than three years, you’ll lose money through this refinance.
Increased interest expenses
While you may qualify for a refinance with a mortgage rate that’s significantly lower than your existing home loan, you’ll pay more in interest over the life of your loan if you extend your repayment term.
Let’s look at an example. Say you’re 10 years into a 30-year mortgage and you stretch your loan back out to a new 30-year term, meaning you’re adding a decade of interest payments to your mortgage budget. Here’s what that might look like on a 30-year, $250,000 mortgage, using LendingTree’s mortgage refinance calculator. The borrower is 10 years into loan repayment and wants to start over with another 30-year loan.
|Existing mortgage||Mortgage refinance|
|Loan term||20 years||30 years|
|Total loan cost||$320,751||$331,993|
As the table shows, you’ll save more than $400 each month on mortgage payments, but you’ll have higher overall loan costs — more than a $11,200 difference.
Fewer proceeds after selling
If you refinance often and extend your loan term each time you do, you’ll build home equity at a slower pace. That’s because during the first several years of repaying your mortgage, more of your payment goes toward interest than principal.
Additionally, as the housing market changes over time, it’s possible that your home’s value could fall below the amount of your outstanding mortgage balance, putting you underwater on your loan. If you try to sell your home while underwater, you won’t make a profit and may have to come out of pocket to cover the difference of your home’s final sales price and your loan balance.
Less flexibility to meet other financial goals
Refinancing your home loan to shorten your term means you’ll have higher monthly mortgage payments. With more money dedicated to your housing expenses, you’ll have less cash to put toward other savings goals, including retirement and your emergency fund.
The earlier you start saving for retirement and the more you contribute upfront, the more compound interest will work in your favor.
Moreover, you’ll want to stash away three to six months’ worth of expenses in your emergency fund. Otherwise, you could be forced to accumulate more debt to cover a rainy day. Before you take on a higher monthly payment, consider its impacts on your other financial priorities.
3 alternative ways to save on your mortgage
How often you can refinance rests largely on how expensive the process will be both upfront and over time. Some homeowners may find it beneficial to refinance more than once within a short time period, while others will find it prohibitively expensive.
If you’re in the latter group, consider one or more of the following ways to cut down on your mortgage costs:
1. Make biweekly payments. One straightforward way to shave a few years off your repayment term and cut down your interest expense is to make biweekly mortgage payments. This means dividing your monthly payment amount by two and paying the half payment amount every other week. Over the course of a calendar year, you’d make one extra full payment — 52 weeks means 26 half-payments, or 13 full payments. Ask your lender to apply those extra payments toward your principal amount only.
2. Pay more than you owe. If you have extra room in your budget to afford it, round your monthly payments up to the next $100 or $200 to shrink your mortgage balance. Be sure the amount above your minimum payment is applied to your principal amount and not what’s owed in interest.
3. Recast your mortgage. Set aside your next financial windfall — whether it’s a tax refund, bonus, inheritance or another extra chunk of cash — to apply for a mortgage recast. You’d pay your lender a lump sum toward your outstanding principal balance. Your lender then recalculates your amortization schedule based on the reduction in your principal balance, which leads to lower monthly payments. In some cases, you only need a $5,000 lump sum to get started, but may also pay a recasting fee.