Owning a home comes with many responsibilities, including choosing whether to refinance when interest rates drop.
Maybe you’ve already refinanced your home—but maybe you’re struggling to make payments or looking to save more money, so you may feel tempted to refinance again.
But how often can you refinance your home? Is it financially safe to do so multiple times in a short period of time? Let’s go over the details of refinancing and other considerations to take into account.
Is There a Limit on How Often You Can Refinance Your Home?
There is no legal limit as to how many times you refinance. However, depending on your loan type, you might have to wait a certain amount of time until you can refinance again. This can also vary from lender to lender.
Most conventional loans do not have a waiting period (if you are changing your agreement’s interest rate or loan term). Some lenders have “seasoning” requirements, which are a waiting period of at least six months before refinancing with the same lender. However, this waiting period can’t stop you from closing a deal with another lender.
If you have a government-backed loan, there is usually a waiting period. VA streamline and FHA streamline, for instance, make you wait a minimum of six months after closing.
What About Cash-Out Refinancing?
Homeowners with conventional loans might opt for cash-out refinancing. This method gives them the cash they need to complete renovations, pay off debt, etc.
There are technically no limits as to how many times you can cash-out. But, before taking out cash on top of your loan, you usually have to wait for a minimum of six months after closing. You also have to have enough equity in your home to borrow against it.
Why You Might Want to Refinance Again
Even if you’ve already refinanced, you might be looking to do so again. Homeowners often choose to refinance to:
1. Score a Lower Interest Rate
When you closed on your loan, you may think you scored a low-interest rate. But interest rates are always fluctuating, so they may be lower now. In 2020, housing interest rates have dropped to historic lows.
If interest rates have dropped since you closed, you might want to consider refinancing. Getting a new loan with a lower interest rate can save you money, sometimes even if it’s only at a 0.5% drop. This point is especially valid if you don’t change the length of your loan term.
2. Change the Length of Your Loan Term
Some homeowners want to shorten their loan term. This option increases monthly payments, but it can end up saving you thousands in the long run.
Other homeowners want to extend their loan term. This approach is common for anyone struggling to make their monthly payments. Extending your loan term results in you paying more in the long run, but it will lower your monthly payments and can make the day-to-day of homeownership more manageable.
3. Get Rid of Mortgage Insurance
Many homeowners can’t come up with a sizeable down payment for their home. If your down payment was less than 20% of the home’s value, your lender requires you to buy private mortgage insurance (PMI).
If you default on the loan, this type of insurance protects the lender. Even though PMI offers you no protection, you are responsible for the premiums. Annually, PMI costs around 0.5% to 1% of your loan value.
These costs can quickly add up. Luckily, once you have 20% equity in your home, you can refinance to get rid of PMI. This route can save you thousands of dollars.
4. Tap into Your Home’s Equity
A cash-out refinance lets you tap into your home’s equity. This type of loan involves borrowing on top of what you already owe on your house.
You will need equity in your home to qualify for a cash-out refinance. It’s best to wait until you have at least 20% equity in your home before applying for a cash-out refinance. Most lenders cap the amount they will lend you at 80-90% of the equity in your home.
You should carefully consider whether this type of loan is worth the interest you’ll have to pay. People tend to use the cash to pay off debt, invest in renovations that will increase their home value, etc.
Things to Consider Before Refinancing
As you can see, there are many benefits to refinancing. Tapping into your home’s equity, lowering your monthly payments, saving on your overall loan—who wouldn’t want to refinance?
While there are no limits on how many times you can refinance, it’s not a decision you should make lightly. Oftentimes, closing costs and other fees can cancel out the savings you make from refinancing if you’re not doing so for a significant rate drop.
Here are some other things you should consider before refinancing:
1. Do You Meet Your Lender’s Requirements?
Just because you qualified for refinancing in the past doesn’t mean you will again. You must meet your lender’s requirements for income, credit score, etc.
2. Application Fees
Lenders will charge you to process your application, run credit checks, etc. You’ll have to pay this fee whether your application gets approved or not.
3. Appraisal & Inspection Fees
Even if you’ve recently had an appraisal, your lender might require a new one. This assessment will determine the value of your home and prevent them from loaning you too much.
Furthermore, lenders may require you to have your property inspected for liability reasons or because of state laws. Inspection fees will run you a couple of hundred dollars.
5. Closing Fees
Seeing as they can cost 2-5% of the loan’s value, closing fees are not cheap. Many closing costs are for an attorney to review and finalize the terms of your loan.
5. Title Insurance and Search Fees
When you refinance with a new lender, you will have to repay for title insurance and search fees. This process ensures that you have the sole rights to your property.
To Refinance or Not Refinance?
Even if interest rates are low, you need to do a little math before applying. If you won’t save money in the long run or it won’t ease your monthly payment burden, it may not be a smart move to refinance.
Whether you should refinance depends on your unique financial situation. If you have questions about refinancing, contact us today! Our friendly, qualified experts here at Associates Home Loan are eager to help.