Too Much of a Good Thing: Refinancing Your Mortgage Too Often

Refinancing your mortgage can be a great way to get a "do-over" on what is probably your biggest financial obligation. With refinancing, you can lower your interest rate, make monthly payments more manageable, or lock in fixed loan terms. Still, is it possible for there to be too much of a good thing - can you refinance your mortgage too often?

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During the first several years of the 21st century, 30-year mortgage rates routinely topped six percent. Then beginning in late 2008, they began to fall sharply, eventually dropping below four percent. This steep decline in rates helped touch off a wave of enthusiasm for refinancing. Meanwhile, the need of struggling homeowners to restructure payments, plus the desirability of locking in record-low mortgage rates only added to the refinancing activity. Plus, of course, lenders anxious to make up for the collapse of the housing boom were only too ready to market refinancing.

In the midst of all this refinancing fever, it is important to ask the question: is it possible to refinance too often? The answer is yes, for a number of reasons.

How Good Refinances Go Bad

Here are nine possible negative effects of refinancing your mortgage too often.

  1. Watered down savings. Application fees, closing costs, and prepayment penalties can offset or even eliminate the savings generated by lower refinance rates. So, it's better to wait and refinance once rates have fallen substantially than to refinance multiple times as rates are on their way down.
  2. Added interest expense. If you continually restart your repayment schedule by refinancing, you might lower your interest rate but still end up paying more interest over the life of the loan. If you refinance a 30-year mortgage twice at five-year intervals, for example, you add 10 years to your repayment period.
  3. Credit impact. Frequent credit inquiries plus repeatedly starting up new loans can adversely affect your credit score, making future borrowing (including your credit card rates) more expensive.
  4. Potential difficulty in selling your home. Frequent refinancing, especially if you take cash out and/or extend the repayment period, can slow down the accumulation of equity in your home. If there is a reversal in home prices in that situation, your loan could easily go "under water" - that is, the value of the home could drop below the remaining mortgage balance. This means that if you needed to sell your home, you would have to come up with extra money to pay off the portion of the mortgage balance not covered by the sale price.
  5. Impediment to future refinancing. As in the above scenario, an underwater mortgage could prevent you from refinancing, causing you to miss out on more attractive opportunities in the future.
  6. Lack of budget discipline. Stretching out your repayment period to reduce monthly payments can be a necessary move when things are tight, but if done habitually it can encourage reckless spending habits.
  7. Greater vulnerability to a career setback. Your mortgage is probably your biggest monthly expense - and thus it would be the toughest to meet if you lost your job or had to take a pay cut. The longer it takes you to pay off your mortgage because of frequent refinancing, the longer you will be vulnerable to this kind of setback.
  8. Retirement saving gets crowded out. It can be difficult to come up with the monthly mortgage payment and still have much left over for retirement saving. The sooner you finish paying off your mortgage, the sooner you can shift retirement saving into high gear.
  9. Mortgage payments extended into retirement. Again, mortgage payments likely claim a significant portion of your monthly budget, and that big expense will be all the harder to meet once you retire. The longer refinancing extends your repayment period, the more likely you are to have to make mortgage payments on a limited retirement income.

Consider Carefully

A mortgage calculator can help you tell whether refinancing makes financial sense, but you need to apply common sense as well. Jumping at every little opportunity could cause you to miss out on bigger opportunities.

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