While there is no limit to the number of times you can refinance your mortgage, there are factors that determine when it makes sense to do so. Let’s take a closer look at how you should decide to refinance your mortgage and how often you can do so.
Most lenders will not accept a refinance loan application if you have refinanced within the last six months – this is an important factor in controlling how quickly you can refinance your home. In addition, many loans come with prepayment penalties (which are fees owed to the lender if you pay off your mortgage before the end of the entire loan term). If there is a high probability that you will ever want to refinance your mortgage, you should never take out a loan with a prepayment penalty.
Here are some common events that would warrant a mortgage refinance:
Mortgage refinancing rates have dropped significantly
You can no longer meet your mortgage payment
You need cash and have equity in your home (i.e., a cash-out refinance).
You want to drastically change the terms of your mortgage (for example, from a 30-year to a 15-year loan).
You are going through a divorce or other situation that dramatically changes your financial situation.
Several years ago, when the real estate market was booming, people were refinancing their homes more frequently than is typical. Mortgage rates were dropping rapidly and homeowners were taking the opportunity to lower their interest rate and save money. One of the main drawbacks of refinancing frequently is the accumulation of fees that can increase your mortgage balance and reduce the amount of equity in your home. When you refinance your mortgage, there are several fees associated with the transaction (title insurance, appraisals, recording fees, document preparation fees, prepaid financing fees, and the list goes on…). Depending on the size of the loan, these fees can easily add up to several thousand dollars. Often, some or all of the fees are built into your new loan amount so that you don’t have to pay additional fees at the time of the transaction. Because your loan balance has just increased, you have reduced the equity in your home. Multiple refinances could start to take a serious toll on your equity. In these days of falling home prices, homeowners need to protect every penny of equity they have.
If you are considering a mortgage refinance, it is imperative that you make your decision based on the big picture, not just the interest rate and payment you can get. You need to consider how long you want to stay in your home. If you think you will only be in your home for a year or two, the monthly savings you will get from refinancing will have to be very high to offset the fees you will have to pay for your new loan. You should also be very careful if you are considering a variable rate mortgage (ARM). If you choose this type of loan, you need to understand when your interest rate will be adjusted and what index it is tied to. NEVER sign any mortgage documents if you don’t understand even a little bit about one of the key terms of the loan, such as when the rate will be adjusted and the index it is based on.
If the current housing crisis has taught us anything, it’s that it may be wise to pay a little more for a mortgage you fully understand. A 30-year fixed-rate mortgage will typically have a slightly higher rate than an adjustable-rate mortgage (ARM), but the peace of mind you can get from knowing how your loan will perform can be worth the extra money.