Refinancing a mortgage can help make your monthly housing payments a lot more affordable. But how often can, or should, you refinance your home loan?
What is mortgage refinancing?
When you refinance any type of loan, including a mortgage, you effectively trade it in for another loan. Your current loan balance is paid off by the new loan, and then you repay that new loan over time.
Why refinance a mortgage?
The main purpose of refinancing a mortgage is to lock in a lower interest rate on your loan, thereby lowering your monthly mortgage payments in the process. You can also refinance if you have an adjustable rate mortgage and want to swap that for the stability of a fixed-rate loan.
Furthermore, if you need money, whether to renovate or pay off credit card debt, you can opt for a cash-out refinance, which gives you a new loan that exceeds the amount you owe on your home. You can then use that excess cash to pay for whatever it is you need; as in the case of a home equity loan, you're not limited to home improvements or repairs.
How many times can you refinance a mortgage?
Technically, there's no limit on the number of times you can refinance a mortgage. But in certain cases, you may be subject to a waiting period between refinances.
More so than anything else, though, you’ll need to make sure refinancing your mortgage repeatedly makes sense. If your new interest rate isn't considerably better than your current rate, it may not be a smart move. The reason? There are closing costs associated with refinancing that can equal 3% to 6% of your new loan amount. Therefore, you'll need to make sure your monthly savings under that loan justify that expense.
As a general rule of thumb, you should look for an interest rate that's at least 1% lower than what you're currently paying. But depending on what your closing costs look like, you may need to aim for even more savings on your interest rate -- like 2%. Once you get some quotes for a mortgage refinance, it pays to use a refinance calculator like this one to see if it makes sense to go that route.
With all of that in mind, it can make sense to refinance a mortgage more than once, but again, you'll need financial justification to compensate for the closing costs you'll contend with. Here are some situations where you may want to refinance more than once:
- Your credit score has improved a lot since you last refinanced, and you're now eligible for an even more competitive mortgage interest rate.
- You want to get rid of private mortgage insurance, or PMI, which you can do if your home value has increased a lot since you last refinanced and you'll be able to take out a new mortgage with a balance of less than 80% of your home's worth.
- Interest rates have dropped substantially on the whole.
- You want to increase the term of your loan because you're having trouble keeping up with your current monthly payments.
- You need money to fix your home or meet other financial goals and are looking at a cash-out refinance.
When might you have to wait to refinance a mortgage?
Though you're allowed to refinance a mortgage numerous times, if you do a cash-out refinance, you may be forced to wait six months from one refinance to the next. Also, if you have an FHA or VA loan, you may need to wait six months to refinance as well.