When it comes to money-saving strategies for homeowners, refinancing your home can be near the top of the list. Of course, each refinance comes with a unique set of circumstances, and you may be wondering whether a second or third refinance is something you want to do, or if you can even do it at all. The short answer is, there’s no law stopping you from refinancing multiple times, but you should definitely weigh the pros and cons before you commit yourself to another long term loan.
If you need to refresh your refinance IQ, you can check out our step-by-step refinance guide or 7 common refinancing myths. Otherwise, let’s dive right in to the meat of the matter: how often can you, and should you, refinance?
The good news is that there’s no official limit to the number of times you can refinance your mortgage. But, that doesn’t mean you should do it over and over again. Nor should you rush to refinance quickly after, say, a new home purchase or on the heels of an earlier refinance.
There may be “seasoning” guidelines in place, which are black-out periods for how soon you can refinance your mortgage after buying a home, as well as how soon you can refinance after refinancing. These guidelines aim to discourage “flipping” homes (homes that are purchased, renovated quickly, and sold as fast as possible) and encourage borrowers to establish a stable payment history.
As always, refinancing depends on your unique situation—your loan terms, your lender, and the type of home loan you have and plan to get.
Your current loan
If you have a conventional mortgage, typically, there are no restrictions between when that mortgage was closed and when you can refinance as long as you’re not taking cash out.
Government-backed loans (e.g., FHA, VA, and USDA) impose a refinance waiting period between six and seven months, depending on the loan issuer. Additionally, borrowers must make payments on time for at least three months, and there must be a demonstrated benefit to the refinance (usually a minimum of 0.5% reduction in interest rate).
Prepayment penalty
Some mortgages come with prepayment fees for paying off your mortgage ahead of schedule. This is a fee charged if you pay the loan before the prepayment period has passed by paying off in cash or refinancing with a new loan. You’ll want to check your current mortgage terms to ensure there’s no mention of a prepayment penalty.
If there is a penalty, you should add the fee to the cost of the refinance to make sure paying it early is worth the expense.
Refinance type: Are you refinancing for a lower rate and term or for cash?
The motive behind your refinance also dictates how often you can refinance your mortgage. For example, cash-out refinances, where you access cash by tapping into your home equity, require a 6-month waiting period before you can refinance again.
But because taking cash out depends on how much equity you have built up over time, they tend to happen less frequently. As a refresher: Your equity is the difference between the value of your home and the amount you have owing on your mortgage. Most lenders require you to have at least 20% equity in your home to be eligible for a cash-out refinance. This helps discourage borrowers from getting into a risky situation where they are overly leveraged with mortgage debt. You can determine your percentage of equity by dividing your equity by the value of your home.
Rate and term refinances, where you reduce your rate and reset the loan term, may be done as often as you like. In volatile market periods, interest rates can sometimes drop quickly. Taking advantage of these rate decreases can mean paying thousands of dollars less in interest over time.
What to consider if you plan to refinance again
Your credit impact
When you refinance, lenders must process a “hard credit pull” to verify your credit score. Hard inquiries may impact your score for up to a year for an average drop of five to ten points. If you are trying to maintain a certain credit score to meet a lender refinance requirement, or if your credit score already prevents you from qualifying for a better interest rate, you may want to push refinancing to a later date when your credit score or financial circumstances have improved.
If you’re thinking about refinancing twice within a 12-month period, you’ll want to ensure that your credit score is in good enough shape to withstand another minor dip when you apply for your next refinance.
With QHL, you can see what rates you qualify for in minutes and with only a soft credit check, which won’t impact your score. Only once you’re ready to lock your rate will we do a hard credit check.
Refinance costs
Regardless of the reason, refinancing multiple times might make sense if you plan to live in your home longer than the time it takes you to recoup the cost of securing the new loan; aka what is the break-even point of the cost upfront versus long term savings.
Every new home loan comes saddled with closing costs, which are usually around 2-5% of your loan balance. It’s important to carefully review these fees to determine how long it will take to offset those expenses. If you plan to refinance again or sell your home before you realize the savings, then a refinance will, ultimately, cost you money—not help you save it.
Even if you choose a no-cost refi option, where out-of-pocket costs are rolled into your loan, you’ll still want to consider the impact of their additional expense. Note that no-cost refinances do not mean your closing costs are non-existent; instead, they’ll be applied to your loan balance and thus incur interest.
Is now the right time to refinance again?
Trying to time external forces for the best chance to refinance can be an exercise in frustration, and the average borrower won’t have all the resources and expertise to do so effectively. The primary factor in determining whether you should refinance your home should always be your present financial needs. Common scenarios may include:
You need access to cash
A cash-out refinance could be just the ticket you need to fund a major expense, such as a home renovation or debt consolidation.
If you have enough equity in your home, you’ll be able to take out a new mortgage in excess of what you owe—and you’ll receive the difference in cash.
Your credit score drastically improved
Perhaps you paid off some major debt, which shot your credit score to new heights.
If your credit has improved significantly since the last time you refinanced, then you may be able to qualify for a better rate. (Add that to today’s low interest rates, and you have the potential to save a lot each month and even more over the life of your loan.)
You need more room in your monthly budget
If other monthly expenses have piled up, and you need more space in your budget, then refinancing could help. A rate and term refinance can offer the opportunity to decrease your monthly mortgage payment through a lower interest rate, extended loan term, or both.
Whenever you refinance, you hit “reset” on the length of time you will be paying your mortgage and interest. For example, if you are five years into paying off your current 30-year mortgage and you refinance to a new 30-year term, you are essentially adding five more years of payments.
However, by extending the remaining balance of your mortgage over a longer time frame, your monthly payments can go down. And if rates are lower now than with your previous loan, your payment could be reduced even further.
If needed, this move can help you free up cash in your monthly budget for bills or other expenses.
Interest rates have dropped and you can save on your monthly payments
There’s a rule of thumb that says if you can get your mortgage rate down by 1% or more, it’s worth looking into.
In case you missed it, mortgage rates recently hit record lows, meaning now could be the perfect time to refinance.
Ready to refinance?
If you’re thinking now’s a great time to refinance to lower your rate, shorten your loan term, or perhaps tap into home equity for cash, then let’s talk. Whether this is your first refinance or you’ve done this before, at QHL we’ll make sure you’ve considered all the right factors to qualify for the best loan possible.
Get started with Qualified Home Loans to find out how much money you can start saving.
