Plus, Other Questions You Might Have About Refinancing
With today’s low mortgage rates, you might be thinking about refinancing your home again. But you might be wondering about the process, especially if you’ve refinanced before. Here are some answers to any questions you might have about refinancing a mortgage.
How many times can you refinance your home?
Refinancing involves obtaining a new loan and using the funds to pay off an existing loan. While there’s technically no limit to how many times you can refinance your mortgage, there could be a limit to how often you can do it. Your lender may institute a waiting period known as a “seasoning requirement” before you’re approved for refinancing. You usually need to wait six to 12 months between getting a mortgage and seeking to refinance.
If you’re refinancing to eliminate private mortgage insurance (or PMI), you might have to wait two years. This requirement depends on the lender, however, and there may be exceptions.
In particular, cash-out refinancing often requires borrowers to wait at least six months from the previous time they refinanced before they can be approved again. Government-backed loans also can have waiting periods. For example, an FHA Streamline refinance requires at least six full months to have passed since the first payment due date on the mortgage, and at least 210 days to have passed from the mortgage closing date.
What are the best reasons to Refinance?
• To get a lower interest rate – If you took out your mortgage when interest rates were higher or your credit score wasn’t in the best shape, you could stand to save a lot of money by refinancing. For instance, a 30-year mortgage of $100,000 with a 6 percent interest rate would cost you $115,838 in interest during the life of the loan. If that rate dropped to 4 percent, you’d save $43,968 over 30 years.
• To reduce monthly payments – Even if you can’t qualify for a lower interest rate, you still could reduce your monthly payments to open up more cash flow by refinancing to a longer-term. That would extend the amount of time you have to pay off the loan and decrease the amount you’re required to pay each month. Note: You’ll wind up spending more in interest during the life of your loan because you’ll spend more time paying it off in the long run.
• To pay off the loan quicker – Your monthly payments will increase by refinancing to a shorter repayment period (and perhaps a lower interest rate, too). But you’ll get rid of your debt sooner and save money in the process. Take the earlier example of a $100,000, 30-year mortgage with a 6 percent interest rate: If you cut the repayment period to 20 years, the monthly payment would increase from $600 to $716 (in principal and interest), but you’d shave off 10 years and $43,895 in interest from the loan.
• To turn equity into cash – If the value of your home has increased since you purchased it or last refinanced, you can refinance again to cash out some of the equity. This involves refinancing to a loan in the amount of your existing mortgage, plus the amount you want to borrow against your equity.
You typically want to maintain at least 20 percent equity after refinancing. Common reasons for cash-out refinancing include paying off high-interest debt (like credit card debt), financing home improvements or starting a business. It’s important to understand that your loan will increase in size and you’ll also have to pay closing costs and other fees. That means your monthly mortgage payments and total interest paid also will increase.
Why shouldn’t I refinance?
• Interest rates dropped only slightly – Although lowering your mortgage rate can help you save money over time, the difference in rates needs to be large enough to warrant paying closing costs on the new loan. If rates only have fallen fractions of a percentage point, it’s probably not advantageous to refinance.
• Your credit score increased a few points – Another way to score a lower rate is to refinance once you’ve improved your credit score. However, the exact score doesn’t matter as much as the credit tier you fall into. For instance, borrowers with a score between 800 and 850 are considered to have exceptional credit, but your lender might consider anything between 750 to 850 as top-tier.
So, if your credit score bumps up from 780 to 800, it’s something worth celebrating—but you likely won’t qualify for a lower rate based on that score alone. Going from a “fair” score of 650 to an exceptional 800 could definitely help you save money, though.
• You want to make a major purchase – It’s a smart move to cash out equity to pay off high-interest debt or to fund a home-improvement project that will ultimately increase your home’s value. But cash-out refinancing is not a great idea for every circumstance. For example, it’s probably not a good idea if you plan to use the money for a big vacation, new car or other non-essential, big-ticket purchase.
You’ll end up paying interest on the loan for years to come, making that purchase much more expensive in the long run. Plus, if you run into financial trouble down the road and your mortgage payments are too high to handle, you risk losing your home.
What are the costs to refinance multiple times?
If your goal is to save money, you’ll want to consider the closing costs compared with your potential savings. Generally, these fees will be about 2 percent to 5 percent of the loan principal. You’ll also want to consider any prepayment or early payoff penalties tied to your mortgage. If your lender charges an early payment penalty, you’ll need to factor that cost into the overall savings of refinancing.
Are there any alternatives to refinancing my home again?
One way to tap your home’s equity without a cash-out refinance is by taking out a home equity loan or line of credit. These options allow you to borrow against the equity in your home and are fairly low-interest. Note: It’s important to make your payments on time or you could risk your home, which serves as collateral for these types of loans. Another borrowing option is a secured or unsecured personal loan, both of which come with fairly competitive rates compared with credit cards (as long as your credit is in decent shape).
An unsecured loan may come with a slightly higher interest rate, but you won’t need to back it with any collateral. This can be a good way to borrow money for just about any reason without risking your home or other assets.
