How Often Can You Refinance A Home Loan
Homeowners with a mortgage often hear about the benefits of refinancing—to snag a lower interest rate, reduce their monthly loan payments, and tap into their home equity. The list of advantages is long and enticing.
But if you've recently refinanced but have seen interest rates drop even further—or start creeping up—you might wonder if you can (and should) refinance again before rates truly skyrocket. So how often can you refinance? Is there a limit on how often you can take tap into this money-saving move?
The answer: You are free to refinance your mortgage as often as you like.
“There’s no legal limit on the number of times you can refinance your home loan,” says Megan Bellingham, head of operations at digital mortgage company Better.com. “Many conventional mortgages do not require a waiting period to refinance. You might be able to refinance immediately after closing on the loan.”
That said, while you can refinance your mortgage as many times as you want, that doesn’t mean you should. Refinancing can be costly, and it can affect your long-term financial obligations—sometimes for the worse. Here's some guidance that'll help you make sense of when to refinance, how often, and whether it's time to refinance again.
Is now a good time to refinance?
Mortgage interest rates dropped to record lows in 2020, which is why many homeowners decided to refinance last year. However, interest rates have started to rise, reaching 3.18% for a 30-year fixed-rate loan as of April 1.
With interest rates still low but on the upswing, you may be wondering if now is a good time to refinance before those rates spiral higher. Sometimes it’s a good idea to act fast to get the best rate, even if you've refinanced recently in the past.
“The cost of waiting to see if rates go lower could backfire, not making it worth the risk," says Bellingham. "The best rule of thumb is that if the numbers make sense, seize the opportunity.”
So when do the numbers make sense?
Typically it's when interest rates have dropped enough to significantly lower your monthly mortgage payments. Even if those loan payments dip by just $50 or $100 per month, over the life of a 30-year loan, this can really add up!
The downsides of refinancing too often
The main downside to refinancing frequently is that you'll have to pay closing costs each time, which typically total 2% to 7% of your home's price. So on a $250,000 home, your closing costs may run anywhere from $5,000 to $17,500.
Closing costs can negate whatever money a refi might save you, which is why it's important to do the math and make sure refinancing makes sense.
“A general rule of thumb is to calculate how long it takes to break even on your closing costs and when you can expect to start seeing real savings,” Bellingham says.
One good place to start to crunch the numbers is an online refinance calculator, which will outline how much you'll pay, and save.
“It’s important to carefully review these fees to determine how long it will take to offset those expenses,” Bellingham adds. “If you plan to refinance again before you realize the savings, then a refinance will ultimately cost you money, not help you save it.”
In addition to reviewing refinancing fees and interest rates, you'll want to consider your own personal circumstances. If you are planning to sell your home in the next few months or if you’ve almost paid off your mortgage, it might not make sense to refinance, since you may not have the loan long enough to reap the benefits.
However, if you've got many years left on your mortgage and are planning to stay put for a while before you pay it off, these are times when a refi may make sense.
How refinancing affects your credit score
Refinancing can also negatively affect your credit score, since lenders verify your credit via a “hard credit pull” when you refinance, says Bellingham. Multiple credit inquires remain on your credit report for up to two years and could cause your credit score to drop, depending on your borrowing habits.
“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,” Bellingham says.
How refinancing can cost you more over the life of the loan
Refinancing may lower your monthly mortgage payment, but it could also extend the length of time you’re paying your mortgage.
“If you’re five years into paying off your current 30-year mortgage and you refinance to a new 30-year term, you’re essentially adding five more years of payments,” Bellingham says. And, extra payments mean you’ll likely be paying more interest over the life of the loan, even if the interest rate is lower.
Plus, when you refinance frequently and lengthen the loan term each time, you’ll build equity more slowly.
In such cases, it may make sense to consider a shorter term loan, like one you can pay off over 10, 15, or 20 years. This leads to higher monthly payments, of course, but it also means you'll likely pay lower interest rates and less interest over the life of the loan.
“If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term,” McDaniels explains. “If you want to pay less interest over the length of the loan, you may want to look for the lowest interest rate and at the shortest term.”
Have you built enough equity to refinance?
Another reason to refinance again is to do cash-out refinance. This is where you borrow money from the home equity you’ve built up in your home and receive the difference in cash. This can be helpful to pay off other expenses you're struggling to cover, such as college tuition or medical bills, or to pay for home improvements, upgrades, or additions so the home better meets your needs.
However, most lenders require you to have at least a 20% equity in the property to refinance. And building equity isn't something you can do overnight, which might mean you'll have to cool your heels for a while before you can refinance again.
“You have to build up enough equity in the home to qualify for a cash-out loan, which can take time,” Bellingham says.
Although you can sometimes refinance with less than 20% equity, your interest rate may be higher as a result. Plus, each time you refinance, you reduce the amount of equity you can tap into in the future. Make sure to take this into account when deciding if another refi makes sense for you.