How Many Times Can You Refinance Your Mortgage?
When it comes to having a mortgage, less can be more. A smaller interest rate is great, less mortgage insurance is super awesome -- together they spell a lower payment. That’s why it’s the ultimate in disappointments when you just finish your refinance to discover that rates have dropped again. Man, you were so close to Mortgage Nirvana, too.
Can You Refinance a Second Time?
In theory, you can refinance as many times as you want. Some lenders will want to see that you’ll make the payments first, so they’ll require a short period between mortgages to establish that you are actually capable of paying (six months is a common seasoning period). Others will charge you a penalty for paying your existing mortgage off before it was due.
Before you do anything, though, stop for a second and pay attention: every time you refinance, it costs you money. That means that you’re going to either have to fork over thousands of dollars for a very small percentage gain or lose that much equity by rolling those fees in to your mortgage. Frequent refinancing just doesn’t usually pan out well.
Experts typically advise homeowners to only refinance when it’s completely and utterly necessary, for reasons including:
Accumulation of Fees. Refinancing to save money makes sense, but only if you’re actually saving money. When you look at the bigger picture, does that refinance really save you money once the loan and closing fees are included? If the answer is “meh,” put the pen away and back away from that closing table. You are about to further endebt yourself for no good reason.
Lengthening Your Loan Term. Having a 30-year mortgage is torture enough, but refinancing it repeatedly just makes that term longer. Unless you’re refinancing to shorten the term to 15 or 20 years, you’re literally resetting the clock each and every time you go to the closing table. Everything starts over, you’re back at square one. Sure, your payment may be smaller if you didn’t cash out, but you’ve got another 30 years to think about what you did.
Chewing Through Your Equity. Some mortgage refinances will allow you to roll your fees into your new mortgage, provided your home has the equity necessary to do so. The problem with this is that many homeowners get the idea that they’re not paying anything for the refinance.
This is not true. You’re paying plenty.
In fact, you’re paying more than you would have if you’d have paid your fees with cash because you’re now paying interest on them, too. Every time you refinance, you add to the balance of your loan and reduce any equity you’ve accumulated. Since you tend to pay mainly interest in the beginning of a mortgage, you’re barely making a dent in your loan principal anyway. It’s an ugly cycle that can end in big problems for you if you keep going and the market does anything but improve dramatically.
If you’re considering a mortgage refinance, the first thing you need to do is figure out if you’re actually saving money. Don’t take someone’s word for it, don’t trust a random blogger, get a mortgage calculator or find an amortization schedule you can use with your favorite spreadsheet software and put your numbers in. When you can show a savings (after all the fees) over the amount of time you plan to continue living in your house, only then should you proceed.
Like a Squirrel Riding a Unicycle, Refinancing Doesn’t Always Make Sense
Sometimes you have a gorgeous mortgage that really can’t get much better, no matter how low rates drop. Maybe you have a really low mortgage insurance rate that can’t be touched now, or perhaps some of the features of your mortgage are pretty awesome, like you can sell it with your home to a new buyer who might pay more for the privilege (this is called an assumable mortgage).
Whatever that golden thing is, just remember that simply because one mortgage has a lower interest rate doesn’t mean it’s a better mortgage. There’s always more to it than that.
Hey, if you have additional questions about refinancing your mortgage, we’re more than happy to help here at Home.Loans, just contact us right away. We’ll even interrupt our interoffice cupcake-eating triathlon to make sure you get the answers you need.