You can refinance as much as you want, but should you?
Refinancing factors to be considered
- You can refinance as many times as you want, but each time incurs costs.
- Refinancing can lower monthly costs, shorten a loan term or cash-out home equity.
- As interest rates rise, fewer borrowers will be able to realize savings from a refinance.
- Borrowers can also tap home equity with a HELOC or second mortgage.
Homeowners can legally refinance a mortgage as often they want with a few exceptions, but that doesn’t mean they should.
In the past few years, mortgage rates have been low. This gave people the incentive to refinance at a lower rate, and get a better deal on a mortgage. As rates have started to rise, refinancing has become less attractive.
But before we explain why, let’s review the main reasons why people refinance.
What are the benefits of refinancing?
People often refinance to lower their rate, so they have to pay less each month to service their debt and have more money in their pockets.
When interest rates are low, people often refinance out of an adjustable-rate mortgage and lock into a long-term fixed low rate.
Borrowers also may refinance out of a 30-year fixed mortgage to a shorter term, enabling them to pay off their house quicker. This often increases their monthly payments, but usually means they will save thousands of dollars in overall interest payments.
People also regularly refinance to cash out equity in their homes, so they can pay off credit cards or large expenses. Because home prices have risen, millions more people have regained equity in their homes to tap.
Qualifying borrowers can refinance their loans as often as they want. Some government-backed loan programs require that a borrower make a minimum of number of payments before refinancing, but the borrowers generally are not otherwise restricted. You should consider the costs and reasons for doing so carefully, however.
What are the costs of refinancing?
The costs of refinancing are one factor to consider. Borrowers are charged significant origination fees to refinance loans. For people looking for lower their rates and monthly payments, it only makes sense if the savings justify the cost of the refinance.
You can do a simple calculation to determine how long it will take for the refinance to begin saving you money. This is done by dividing the monthly savings of the refinance by the total fees to refinance (for example, $3,500 in refinancing fees/$100 monthly savings = a payoff period of 35 months). It won’t make sense to do the refinance if you plan to sell your home sooner than that.
Calculating the payoff period doesn’t tell the full story of the costs of a refinance, however. Refinancing typically extends the term of the mortgage. Your old mortgage may have 20 years left to pay off, and you refinance into a new 30-year mortgage. The overall costs of that new refinanced mortgage could be significantly higher than the old mortgage because you have added 10 more years of interest payments.
Your time is another cost to consider. Although there are several streamlined refinancing programs that involve less paperwork, in many cases, the process is not that much different than a traditional home-purchase loan. A refinance will typically involve lots of paperwork and a thorough vetting of the borrower’s creditworthiness. In the case of cash-out refinances, you will have to get your home reappraised. According to data from Ellie Mae, it took on average four days longer (50 days versus 46 days) to close on a refinance than on a home-purchase loan. The point is, refinancing is not quick and easy.
As mortgage rates rise, it makes less sense for a borrower to cash out of a low-rate fixed mortgage into a higher-rate mortgage. Instead, you may consider a home equity loan or a second mortgage as a strategy to tap the equity.
Although you’ll be able to refinance as often as you like, the bottom line is that it is important to consider your reasons and options carefully.