Is It Bad to Refinance Your Home Multiple Times?
If you’re a homeowner, the idea of refinancing your mortgage may seem like an opportunity to put cash back in your pocket immediately or save money over the life of your 15- or 30-year loan. You may even consider refinancing more than once if interest rates drop significantly and you qualify for better deals as time passes.
You have two options for mortgage refinancing. A traditional refinance converts your existing mortgage to a new loan with updated rates and terms — usually to reduce the length of the loan and the interest paid over time or to extend the loan out and lower your monthly payments. With a cash-out refinance, you increase your loan amount and take out the difference in cash to pay for high-interest debt or cover large planned expenses.
Both options provide opportunities to improve your financial situation, either in the short or long term, but refinancing multiple times can have significant costs and consequences if you don’t plan carefully. Here’s what to consider before you take action.
Why homeowners refinance multiple times
Homeowners may look to refinance once or more for a variety of reasons. You may need cash to consolidate other debt, pay for college tuition or take on a large renovation project. If your income is significantly higher than it was when you bought your home, you might refinance into a shorter-term loan that costs more each month but reduces the interest you pay over time. Or, if you need to lower your mortgage payment while taking advantage of a better interest rate, you could refinance into another loan of the same length.
The reasons to refinance, and when to do so, depending on each homeowner’s financial situation and goals.
And while there are no hard and fast rules about how many times — or how frequently — you can refinance your home, the main considerations are how much a refinance will cost and how long it will take to recoup that cost.
While many people do inquire about mortgage refinancing when interest rates are low or on the decline, it won’t make financial sense for everyone to go through the process just because they are eligible for a lower rate.
For example, if you aren’t planning to stay in your current home for the amount of time it will take to recoup what you would pay in closing costs and fees, which Donna Bradford, assistant vice president of mortgage specialized operations at Navy Federal Credit Union, says is often around two years or more, a refinance isn’t likely the best option.
If your chances of relocating are low, however, you can explore whether the change in monthly payments and interest owed make sense given your current and expected financial situation — or whether a cash-out refinance to consolidate other high-interest debt would actually reduce your monthly expenses and improve your overall financial position even if your mortgage payment increases.
The hidden costs of refinancing
Refinancing isn’t as simple as signing a few documents and going about your day. The other costs associated with the process may cancel out the benefits of a lower interest rate depending on your long-term plans for your home. A refinance has many of the same costs as an initial mortgage, so it’s important to calculate whether you’ll save money in the long term to recover those expenses.
“It’s almost as though you are buying the house back from yourself because you still have those same fees as when you purchased the home,” said Bradford.
The closing costs on your refinance will include application and appraisal fees, a credit pull and title search to ensure you are the property owner, attorney fees and any costs to transfer and build your escrow account — which pays for taxes and insurance premiums — if you are working with a new lender.
Closing costs vary widely depending on home prices and legal requirements where you live, but you can expect to pay 2% to 5% of the home’s value on average, says Tamara King, vice president of residential policy and member engagement at Mortgage Bankers Association.
“You still want to crunch the numbers, always,” King said. “A reason why maybe you wouldn’t [want to refinance] is if it’s going to cost you more to refinance and you won’t be able to recoup the cost.”
Should you refinance now?
Experts say that there isn’t a clear answer to whether homeowners should refinance now or at any specific point in the future because each individual has different goals. Low interest rates can be attractive, but homeowners should look at their bigger financial picture and keep in mind that the market is volatile.
The interest rate you qualify for depends on credit, loan amount and terms, so it’s best to shop around and compare rates at different lenders. You can shop for refi offers through the LendingTree platform.
Your rate also depends on factors that are outside of your control, such as the economy and how banks react. The Mortgage Bankers Association’s mortgage finance forecast suggests there will be a steady increase in interest rates for 30-year fixed rate loans from 2018 to 2020. According to LendingTree’s January 2018 mortgage offers report, the average APR for a refinance ranges from 4.33% to 4.89% depending on credit score — and these numbers have also been on the rise. Your loan APR matters, as it represents the annual cost including fees.
Bradford recommends homeowners work with their financial adviser and mortgage lender to understand the impact of interest rates and determine if refinancing makes sense with other financial priorities and obligations.
“Borrowers really [need to] make sure they get the guidance on this so that they understand what the costs are, that it makes sense for them to have the expense of a refinance, that they understand when they are going to break even and hit that recoup period, and how long they plan to have the home,” she said.
Negative effects of refinancing too often
While refinancing can lower your costs in some cases, there are a number of pitfalls associated with doing so too often.
- Costs cancel out savings. Before you refinance, calculate how much you’ll pay in closing costs and fees, and how long it will take to get back to what Bradford calls “square one” — your break-even point where you recoup those expenses. Refinancing has associated costs every time you go through it, so if you are hoping to save money, wait until interest rates have fallen significantly to balance out what you spend on the process.
- Added interest over the life of the loan(s). While you may qualify for a lower interest rate for your refinance compared with your initial mortgage, extending the life of your loan may mean that you actually pay more interest over time. If you are already 20 years or even 10 years into your 30-year mortgage and you refinance into a new 30-year loan, you are adding a decade or two of interest payments onto your total.
Similarly, if you refinance multiple times — twice at five-year intervals, for example — you’ll add 10 years to your repayment plan along with a significant amount of interest.
- Dings to your credit. A single hard pull on your credit to take out a new loan will only impact your score by a few points, Bradford says, but if you refinance several times within a short period, this could add up and make borrowing more expensive. Under the FICO model, if your refinance is reported as a new loan, it will show up as a recent credit obligation and could impact your score more significantly. Track your credit score so you know how these inquiries affect you.
- Problems selling your property. If you refinance often and extend your loan repayment period, your home equity will accumulate more slowly. As the housing market fluctuates, it’s possible that your property value could fall below your mortgage balance and put your loan “underwater.” If you try to sell your home, you may have to cover the difference.
Bradford says homeowners should stay on the conservative side when refinancing. If you don’t have the assets to write that check, you may not be able to sell — or worse, you could lose your home.
“Try to think about what is the worst thing that can happen and can I afford to do this, because it’s a huge investment,” she said. “Nobody wants to end up upside down on what they owe and what their property is worth.”
- Difficulty refinancing in the future. While it is possible to refinance an underwater mortgage, it’s difficult to do with conventional lenders — and you might miss out on better interest rates in the future as a result. The federal government has extended its Home Affordable Refinance Program, which allows homeowners with less-than-perfect credit and high loan-to-value ratios to refinance underwater loans, through December 2018.
- Reckless spending habits. The potential for lower monthly payments that come with a traditional refinance sounds great, but it shouldn’t be your primary strategy to make ends meet when things are tight. Experts also caution against increasing your secured debt to cover your unsecured debt without careful budgeting.
For example, you can use a cash-out refinance to pay off high-interest credit cards and other debt at the lower interest rate that comes with your mortgage, but this only works if you can make your monthly loan payments. Your property secures your mortgage, which means that if you default, the lender can foreclose on your home.
“If you pay off your credit cards but can’t pay the increased monthly cost [of the loan], you’ve now put your home in jeopardy,” King said. “It’s not great to not pay your credit card, but the outcome is less than if you lose your house.”
- Vulnerability to fluctuations in income. Your mortgage is likely the largest bill you pay each month. If you lose your job, have a medical emergency or take a pay cut, it may be difficult to cover the expense. If you’ve refinanced multiple times or into an additional 30-year term, you carry this burden for longer — which is risky even if your monthly payment is lower.
Bradford recommends protecting yourself against this by paying a little bit extra on your mortgage each month. This will also allow you to pay down your loan faster without going through the cost of a refinance, she says. Even if you make one additional payment each year, you could reduce your loan from 30 years to 19 or 18 — but make sure there are no prepayment penalties to do so.
- Smaller contributions to retirement savings. If you refinance into a shorter loan and increase your monthly mortgage payments as a result, you may have less cash to put toward other savings goals, including retirement. The earlier you start saving for retirement and the more you contribute upfront, the more compound interest will work in your favor, so before you take on a higher monthly payment, consider the impact on the rest of your spending and savings priorities.
- Payments made in retirement. If you refinance multiple times into a 30-year loan later in life, know that you may be making payments well after you retire. King cautions homeowners to be more mindful of extending the length of their mortgage payments as they age. If you are open to making payments in retirement, consider how those might affect your budget in the future compared with your current financial situation.
Experts agree that while refinancing multiple times may work for some, the decision rests largely on how expensive the process will be both upfront and over time in interest. Some homeowners may find benefit in refinancing more than once in a short period of time, while others will find it prohibitively expensive.
“It all goes back to the total cost because nothing is free,” said Bradford. “So any time you go through this process, there is a cost to do so.”