Homeownership can be complex. Part of being a homeowner means understanding the refinance process and how it can help you save money on your mortgage. The refinance process can be complex as well so it is important to have a good understanding before you begin the process.
What is a Mortgage Refinance?
A mortgage refinance means that a borrower’s loan is replaced by another loan. The replacement loan typically has an updated rate and updated terms and could potentially help homeowners in other ways from getting cash out of their home, improving their loan-to-value (LTV) ratio, etc. Different types of refinances can help in different ways:
- Rate-and-Term Refinance
- Cash-Out Refinance
- Cash-In Refinance
- Streamline Refinance
This is an option that can provide you the opportunity to refinance your house with a better interest rate and better loan terms. When most homeowners think of a conventional refinance, this is the type of refinance that usually comes to mind. This is a great option for those that want to save money over the course of their mortgage!
This is a popular type of refinance amongst homeowners because it provides individuals the opportunity to tap into their home equity. In a typical refinance, the new loan amount reflects the remaining loan amount that is due to the lender. In a cash-out refinance, an individual can borrow more than what they owe through accessing the amount of equity available. Lenders may have limits in how much equity a homeowner can access in a cash-out refinance, but individuals may be able to get thousands from their home!
You can think of a cash-in refinance like the opposite of a cash-out refinance. Instead of getting money from the home, homeowners can provide additional funds to the lender to reduce the total amount due from the borrower. This can improve the LTV of the borrower which can make more financial opportunities!
If your existing mortgage is an FHA loan then you may be able to qualify for a streamline refinance. These types of refinances have more relaxed qualifications and can provide subprime borrowers the opportunity to refinance their home.
How Often Can You Refinance Your Home?
A homeowner will not be limited to the amount of times they can refinance their home. However, depending on the type of refinance they choose and their lender, there may be rules that can determine the level of frequency allowed. Not only may an individual encounter rules from their lender, there are other considerations to keep in mind about the type of refinance. Just because it is possible, doesn’t mean it is something that can be beneficial.
How Many Times Can You Refinance?
The answer is entirely up to you, your lender, and loan type. Generally, you shouldn’t expect to face any limitation on how many times you can refinance your mortgage.
Should You Refinance Your Mortgage More Than Once?
Regardless of how often you refinance, you want to make sure you are doing it to reap the benefits one way or another. The amount of times that you refinance can be based on your goals of the refinance. For example, you may refinance only one time in order to reduce your interest rate and improve your loan terms but then refinance again in order to tap into your home equity and get cash out of your home. Popular reasons people choose to refinance include:
- Improve Interest Rate
- Change Loan Term
- Get Rid of Private Mortgage Insurance (PMI)
Improve Interest Rate
There are two different types of mortgages. There are adjustable-rate mortgages (ARM) and fixed-rate mortgages. When an individual has an ARM, then the interest rate on their mortgage is constantly changing. This can be hard to budget for. If you refinance your home, then you can change your ARM to a fixed-rate mortgage which means the interest rate will stay the same for the entire course of the loan! This can be easier to budget for financially.
Not only could you change the type of interest rate, but you could also change the overall interest rate. If mortgage rates are low and your credit score is good then you may be able to get a lower interest rate than the one on your existing mortgage! For example, if your original interest rate is 3.67% then refinancing could mean you get a rate of 2.13%! Less interest paid over the course of the mortgage can mean more money saved.
Change Loan Term
When a homeowner wants to improve the length of their loan, they can do so with a mortgage refinance. For example, oftentimes homeowners get a mortgage with a 30-year term. After 7 years, a homeowner may want to refinance for a 15-year term. This means that they can save 8 years of repayment!
Get Rid of Private Mortgage Insurance (PMI)
PMI is a type of insurance that is designed to reduce the risk that lenders face when they take you on as a borrower. A good rule of thumb is to expect lenders to require at least 20% of equity before they feel like the homeowner can get rid of this protection. This can reduce the overall monthly payment and even save money over the course of the loan!
What to Keep in Mind if You Refinance More Than Once
While refinancing can come with many benefits, it doesn’t come for free. Refinances can be costly. That is why some factors to keep in mind before deciding to begin the refinance process include:
- Application Fees
- Appraisal Fees/Inspection Fees
- Closing Costs
- Search Fees
- Lender Criteria
- Prepayment Penalties
- Mortgage Points
Not every refinance will have these fees! However, it is important to keep in mind that these are some expenses that you may be responsible for.
Even when you want to start the process, you can expect to pay some money. Some lenders require applicants to pay an application fee if they want to request a refinance. It is important to keep in mind that even if you pay the application fee, it doesn’t guarantee that you will actually get a refinance! That is why it is important to research lenders before making a decision.
Appraisal Fees/Inspection Fees
In most refinances, the home will need to go through an appraisal. A professional appraiser will go through the home and determine the actual market value of the property. You may be in for a pleasant surprise to see that the home is worth more than what it was worth when you originally bought it! Other types of fees include inspection fees that may be required as well.
You can generally expect closing costs to be between 2% to 5% of the loan amount when you refinance your home. This means that you may be responsible for thousands of dollars at the end of the refinance! Some refinances advertise themselves as having no closing costs. However, that can be a little bit misleading. In those instances, instead of the closing costs being due at the time of closing, they can get rolled into the loan to increase the overall loan amount. There may be other ways that lenders try to move the closing costs but they are still a part of the loan in one way or another! Make sure to confirm this information with your lender so you can have a clear expectation of what you may have to deal with.
If you are choosing a new lender, you may come across some search fees. Title insurances and search fees may be required to show that you are the sole individual that has rights to the property!
Besides the fees that you may come across, you will also need to deal with lender criteria when you refinance. If you find that your credit score dropped from when you originally got your mortgage, then that can mean some bad news. It is important to be aware of the lender criteria before you begin the refinance process so you don’t potentially waste money on application fees if you have no chance of qualifying!
All borrowers may assume that lenders just want them to repay the loan as fast as possible. While this would make sense, that’s actually not the case. This is why some lenders may impose prepayment penalties onto borrowers if they try to pay off their loan too soon. Make sure your original loan doesn’t have any rules that may require you to hold off!
This is an optional fee that may be able to help homeowners during their refinance. Some lenders offer a mortgage item known as a mortgage point. Also known as discount points, these mortgage points are fees that are given to your lender in exchange for a better interest rate. One point will equal 1% of the mortgage amount. For example, if your mortgage is $150,000 then one mortgage point will cost $1,500. Lenders will generally place a limit on the amount of points that a borrower can buy, but can help an individual save over the course of their loan.
Is It Bad to Refinance Your Home More Than Once?
Not necessarily! You shouldn’t be looking at the amount of times you refinance when deciding if it is worth it. Instead, looking at other factors like your goals of the refinance, your break-even point, and more can truly show if a refinance can be beneficial. Make sure not to get caught up on how often you do it. You can also speak to your lender to find out if there are other limitations that may make it especially unhelpful to refinance.
Do You Have to Wait 6 Months to Refinance Your Home?
Maybe! Generally speaking, there is no waiting period to refinance. You just want to make sure that there is a clear benefit to refinancing. If there isn’t one, then you may benefit from waiting longer, like 6 months. However, you can discuss any limitations with your lender to ensure that you are not dealing with any restrictions.
A mortgage refinance can be complex and intimidating. Luckily, it doesn’t have to be. The amount of times that you decide to refinance your mortgage is up to you and your lender. It may be beneficial to refinance your mortgage 3 times over the course of repayment, while other times it may only benefit to refinance once. There are four popular types of refinances which are:
- Rate-and-Term Refinance
- Cash-Out Refinance
- Cash-In Refinance
- Streamline Refinance
Each of these refinance options have their own set of benefits! Oftentimes, homeowners are looking to improve their interest rate, loan terms, get cash out of their home, make their finances more manageable, or even improve the amount of equity they have. Regardless of the motivation, the refinance needs to make sense! Don’t fret about how many refinances you may get, just worry about if it is actually worth it. Refinances aren’t free so the costs may outweigh the advantages!