How Often Can You Refinance Your Home?
How often can you refinance your mortgage? There aren’t any laws or general rules governing that, so, in theory, you could spend your entire adult life as a homeowner with a new application on the go.
Were you to do that, of course, you’d soon go crazy keeping on top of all the admin. (As if any sane person would choose to spend decades constantly refinancing.) But there are at least four practical reasons why most of us restrict our refinances to a manageable number:
1. Home Refinance Benefits Aren’t Always Available
Homeowners can have many reasons to refinance, but most have one of two: They want a lower mortgage rate and lower monthly payments, or they want to free up some of the equity in their homes through a cash-out refinancing. But you can’t be sure that either of those benefits will be available whenever you want them.
You can only refinance to a lower mortgage rate and get lower monthly payments if current refinance rates are lower than the one you’re already paying. We’ve grown used to falling rates being the dominant trend in recent years. A quick glance at Freddie Mac’s rates archive shows that the annual average for a 30-year fixed-rate mortgage (FRM) in 2006 was 6.41 percent. That fell every year right through to 2012 when it stood at 3.66 percent. It edged up to 3.98 percent in 2013 and 4.17 percent in 2014, only to fall again in 2015 to 3.85 percent. But, in its January 2016 Housing Forecast, Fannie Mae’s economics team predicted that those rates will average 4.0 percent in the first quarter of 2016, 4.1 percent in the following two, and 4.2 percent in the last. If that forecast proves correct, and that trend continues, refinancing to a lower rate will become an option for fewer and fewer homeowners. In other words, a window of opportunity may be closing.
Equally, cash-out refinances are only available to those with significant “equity” (the amount by which the current market value of a home exceeds the current balance on the mortgage(s) it secures) in their homes. And, as many painfully discovered following the bursting of the housing bubble in 2007-08, the old truism that home prices only rise wasn’t a truism at all – because it wasn’t true. In recent years, things have been getting better: 91.3 percent of mortgaged homes in the U.S. had at least some equity (though not necessarily enough for a cash-out refinance) in the second quarter of 2015, compared with 77.7 percent three years earlier, according to CoreLogic. Still, you can’t be certain your equity will keep going up, so there may be times when you won’t be able to refinance to access it.
2. Closing Costs Kill the Home Refinance Deal
You can use mortgage calculators to easily work out how much a refinancing should reduce your monthly payments. But you also need to take into account closing costs.
Suppose you stand to save $100 a month, and your closing costs are $4,000. Your “payback period” (the time it takes you to recover those costs in savings) is 40 months. That’s fine if you plan to stay in your home for many years, but if you think you might move in, say, three years (36 months), the refinancing no longer makes sense: It will have cost you $4,000 to save $3,600 (36 months x $100). Indeed, you might question whether it’s worth the time and effort even if you won’t be moving for four years.
3. No Closing Costs Kill the Home Refinance Deal
You might be thinking the easy way to get around that last point is to find a lender who’s offering to refinance with zero closing costs. Well, maybe.
However, many (or maybe most or all) of those deals come with prepayment penalties. These usually specify a period during which you can’t refinance or otherwise make early payments without incurring a significant financial penalty. And, if you think you might move before that period expires, the financial viability of your deal may be undermined. Whether you’re buying a home or refinancing, always check your loan agreement for sneaky prepayment penalty clauses.
4. It Doesn’t Fit into Your Financial Big Picture
If your ambition is to be free of your mortgage as soon as possible, then a refinance may be the last thing you want. These usually reset the clock on the loan, so if, for example, you’re 10 years into a 30-year mortgage, and you refinance into a new 30-year one, you’re back to having three decades of payments ahead of you. One way around this is to refinance to a shorter-term loan: a 10-, 15- or 20-year one.
Potentially worse for your financial health than 30 more years of payments is how your mortgage is “amortized.” Early on in your loan, a huge proportion of each monthly payment goes to covering interest charges, and a small amount goes to paying down your “principal” (the amount you borrowed). As time goes on, the former gets smaller and smaller while the latter gets bigger and bigger, so toward the end you’re paying little in interest and nearly all of each payment goes to reducing your debt. Resetting your mortgage clock resets your amortization table, and that’s something you may prefer to avoid, not least because it may affect your net worth.
Don’t Be Put Off
The real question here isn’t “How often can you refinance your mortgage?” It’s “How often should you refinance your mortgage?”
The great thing about refinancing is that it’s easily reduced to dollars and cents. Now you know what to look for, you can work out (remember those mortgage calculators) the financial implications and make an informed choice. Used carefully, both cash-out refinances and those that reduce your rate and monthly payments can be hugely beneficial. And many experts believe that now may turn out to be among the best moments in our lifetimes to undertake one.