How Often Can You Refinance Your Home?
It might seem like the Federal Reserve bounces interest rates around more than an Olympic Ping-Pong ball. Double-digit rates were rampant throughout the 1980s and ’90s and have fallen since then to record lows. After peaking close to 7% right before the 2008 housing crisis, today’s average rate stands at 4.38%. Oftentimes, rising or falling rates don’t have any tangible impact on your day-to-day life.
But, if you took out a mortgage when rates were much higher, it is possible to find yourself with an interest rate on your mortgage that’s higher than what’s currently being offered.
If this happens, it might make sense to refinance your mortgage and get a lower rate. When your rate is lowered, you’re not only going to have a lower monthly payment but you could save a ton of money over the life of your loan.
Some people may even want to refinance their mortgage more than once.
Knowing whether it’s the right time to refinance — and if you can refinance — can be confusing. In this article, we’ll help you sort out how you can decide whether a refinance makes sense for you, and more importantly — how often you can refinance your home if you decide it’s the right move.
How often can you refinance a mortgage?
Fortunately for you, there are no laws when it comes to how often you can refinance a mortgage. “We’ve had [customers] where they just completed their loan the previous month, and they come in to refinance with us,” said Joe Zeibert, senior director of product pricing and credit at Ally Bank.
Refinancing again might more of an inconvenience for the lender than for you personally. They are, of course, going to get the short end of the stick here because they’ll gain less profit on the interest on your loan if you get a lower rate. That’s one of the reasons some lenders may insert clauses for “prepayment penalties” in mortgage contracts.
Prepayment penalties are fees lenders charge you for paying off your loan early. These prepayment fees are more limited now thanks to the Dodd-Frank Act. For example, federal credit unions are not allowed to charge prepayment penalties on mortgages they issue, and some lenders may not be able to charge prepayment penalties after three years from the loan origination.
Before you sign any mortgage or mortgage refinance documents, it’s especially important to figure out what — if any — prepayment penalties come along with the deal, as this could limit your ability to refinance your loan in the future.
So, it is possible to refinance as often as you want, barring any complications from pesky prepayment penalties. But, perhaps a better question is this: Should you refinance your mortgage?
When it makes sense to refinance again
No mortgage refinances are entirely free, even though some refinance situations (such as cash-out refinances) result in cash back in your pocket. For example, you’ll have to pay closing costs all over again. That’s why it’s especially important to consider the factors that may make refinancing worth it to you or not. Taking careful stock before you pull the trigger can save you thousands of dollars down the line.
Interest rates have dropped
The first thing you should look at is whether or not you can get a lower interest rate than you’re already paying. There’s no sense in refinancing for a higher, more expensive interest rate unless you’re refinancing for a different reason, such as a desire to get a longer-term loan and lower your monthly payments.
Historically, interest rates have gone as high as 18% in the last 50 years, according to the Federal Reserve Bank of St. Louis. However, recently, we haven’t seen rates anywhere near that high. One recent study showed that homeowners who refinanced in 2010 saved an average of $160 per month on their mortgage payment.
How low of an interest rate you can expect to pay varies based on a lot of things, such as your credit score and your lender. To find out what interest rate you can expect to pay based on these various factors, you can use this interest-rate finding tool.
Closing costs don’t eat your potential savings
Most mortgage refinances come with closing costs. These are costs that you pay both to your lender (such as loan origination fees) and to third-party people, such as the professionals who appraise your house to determine how much it’s worth. Typically, these closing costs run between 1% to 4% of the cost of the loan, according to Jensen.
Your lender can tell you exactly what closing costs you’ll pay when you refinance your mortgage. To see whether it still makes financial sense to refinance after you pay for closing costs, all you have to do is divide your total closing cost price by your monthly savings. For example, if your closing costs are $2,000 and you’ll save $200 per month on your mortgage, it’ll take you 10 months to break even after paying for the closing costs. After that, you’ll enjoy a sweet $200 extra per month.
The key to this equation is that you’ll be around long enough to realize the savings. “If you’re not planning on sticking around until after you’ve paid off the closing costs with the savings that you’re making every month, then it doesn’t make sense to refinance,” said Jensen.
You can also use LendingTree’s refinance calculator to see if the numbers work out in your favor toward refinancing.
Your financial goals
It’s also important to take into account your short-term and long-term financial goals. Generally, you’ll be deciding between two opposite ends of the scale:
- Do you want the lowest monthly payment possible?
- Do you want to be debt-free as soon as possible?
Different home refinance loans come with different term lengths, and this will affect your monthly payment and for how long you’re in debt.
You may be able to stretch your loan out for another 30 years to get a lower payment, but that means you’ll be in debt for longer, and possibly pay more interest over the long run. On the flip side, you could get a 15-year mortgage and accelerate your payments so that you’re debt-free sooner, but your monthly payments might go up as a result.
“No closing cost” refinances
It is possible to find “no closing cost” refinances, but be warned: that doesn’t mean they’re really free. Lenders will find a way to get their money one way or another, after all.
More commonly, a “no-cost refinance” just means that you’ll pay a slightly higher interest rate to compensate over time the lack of upfront closing costs. Another common arrangement is to roll the closing costs into the loan balance so that you don’t pay anything out of pocket at the closing table.
No closing cost refinances that charge you a slightly higher interest rate without increasing your loan balance are particularly useful, according to Dan Green, a 15-year veteran of the mortgage industry and founder of Growella.
“You’re not paying closing costs over and over again,” Green said. “You’re taking smaller steps to lower your interest rate instead of paying the cost for the one big jump.”
Over time, zero closing cost refinances can be a much more effective strategy for paying off your home quickly, especially if you take those monthly savings and send them back to your lender each month, he adds.
Talk to a professional
Maybe you’ve decided that refinancing your home is right for you, given the current interest rate climate and your goals. Everything we’ve talked about here is just information; the next step is to actually find a lender to talk to, according to Green.
“It’s like WebMD. You don’t want to self-diagnose,” he said. “I think all of these decisions still should be run past the loan officer just to see.”
Once you find a lender and a loan that work for you, read the fine print carefully to make sure there are no hidden fees or traps. And, always, remember the reason why you’re seeking out a home refinance in the first place. According to Zeibert, “As long as you have clear goals, you’re gonna go down a path and it’s probably gonna be a big financial win for you.”