Are you having trouble making your mortgage payment each month? A refinance can help you manage your money more effectively and help lower your interest rate, remove private mortgage insurance or take cash out of your equity. But here’s a twist: What if you’ve already refinanced your home loan? Can you, or should you, do it again?
We’ll take a look at how often you can refinance and help you decide whether doing so more than once is the best decision.
How Many Times Can I Refinance My Mortgage?
There’s no legal limit on the number of times you can refinance your home loan. However, mortgage lenders do set a few rules that dictate the frequency of refinancing by loan type.
Remember: You do need to have equity built up in order to take cash out against it. You might have less equity in your home than you think if you took a cash-out refinance in the past. Every time you dip into your equity, you reduce the percentage of your home loan that you can use. Most lenders won’t allow you to take out 100%. You’ll need to do some math and figure out exactly how much equity you have before you refinance.
Let’s take a look at an example. Imagine that you pay off $50,000 of your home loan and have a remaining principal of $100,000 left on your mortgage. You want to do $30,000 worth of repairs, so you opt for a cash-out refinance. Your new loan principal is $130,000 and you take away $30,000.
Fast forward 2 years and let’s say that you now need $20,000 to pay off some debt. In the years after your refinance, you’ve paid only $2,000 off your principal after accounting for interest. Though your loan balance is now $128,000, you only have $22,000 worth of equity in your home. Most lenders only allow you to refinance 80% – 90% of your loan value. If you withdraw $20,000 in a cash-out refinance, you’re taking over 90% of your equity. This means that you’ll likely have trouble finding a lender who’s willing to service your refinance. If you do find one, you probably won’t get the best possible interest rate, meaning you’ll pay thousands of dollars more in interest by the time you pay off your home loan.
Should You Refinance Your Mortgage More Than Once?
There are a number of reasons why you might want another refinance. Here are some situations when it could be to your advantage.
Taking A Lower Interest Rate
Have interest rates lowered since you got your refinance? You may want to refinance again to take advantage. You can almost always save money if you’re able to lower your interest rate without changing the term of your loan.
Just a small change in your interest rate can save you hundreds, or even thousands, of dollars. For example, let’s say you currently have a 20-year mortgage loan with $150,000 left on your principal and you pay an interest rate of 4.5%. You have the chance to refinance your loan with the same terms and an interest rate of 4% APR. If you don’t refinance, you pay $77,753.84 in interest by the time your loan matures. If you take the refinance, you pay $68,152.95 total in interest. Lowering your rate just 0.5% means you’ll save over $9,601 in interest.
Increasing Your Loan Term
Income changes can happen at a moment’s notice. Even if you’ve already refinanced in the past, you may need to increase your loan’s term again if you’re having trouble making payments. A second or even third refinance is preferable to foreclosure for homeowners and lenders. However, remember that every time you refinance your loan to a longer term, you increase the amount you pay in interest.
Getting Rid Of Mortgage Insurance
Do you recall whether you were required to buy private mortgage insurance (PMI)? Here’s a hint: You did if your down payment was less than 20% on a conventional loan. PMI is a special type of insurance that protects your lender in the event that you default on your loan. PMI offers you no protection as the homeowner, but you must still pay the recurring premiums as a condition of your loan. It’s possible to refinance and remove PMI once you reach 20% equity in your home. It’s a great way to save money over time, even if you’ve refinanced your loan’s interest rate or term in the past.
You may also want to refinance from an FHA loan to a conventional loan when you reach 20% equity. An FHA loan means you must pay for insurance throughout the duration of the loan. However, if you refinance from an FHA loan to a conventional loan, you won’t have to pay for your lender’s insurance as long as you have at least 20% equity in your home.
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Things To Consider When Refinancing Multiple Times
Refinancing more than once isn’t for everyone, even if the benefits seem universally attractive. Let’s take a look at a few things you need to consider before you refinance again.
You Need To Pay Closing Costs Again
Remember that every time you refinance, you need to pay closing costs. Some common closing costs you’ll see when you refinance more than once can include:
- Application fees: Your lender might charge you an application fee when you request a refinance. You need to pay for your application fee whether or not you actually receive a refinance.
- Appraisal fees: Have you recently had an appraisal? Even if you have, your lender might require another before you can refinance. This helps ensure that the lender isn’t loaning out too much money.
- Inspection fees: You might need to get an inspection before you can refinance. Some states require certain types of inspections each time you refinance, others only require inspections every 5 – 10 years.
- Attorney review fees and closing fees: You need an attorney to finalize your loan and review it before closing in some states. Attorneys’ fees can vary widely from state to state.
- Title search and insurance: When you refinance with a new lender, they need to know that you’re the only one who has rights to your property. Expect to pay title insurance and search fees again (even if you’ve recently refinanced) when you work with a new lender.
Closing costs vary by location but you can usually expect to pay 2% – 3% of your total loan amount. This can quickly cut into any money you’re saving – especially if this isn’t your first refinance.
You Still Need To Meet Your Lender’s Standards
Just like when you buy a home, you must meet your lender’s standards when you refinance. Have more debt, less income or a lower credit score now than when you last refinanced? You may have difficulty getting approved. Know your debt-to-income ratio, current equity and credit score before you apply.
You Might Face Prepayment Penalties
While Rocket Mortgage® does not have a prepayment penalty, some lenders include clauses that penalize you if you pay off your loan before your term ends. For example, you may need to pay anything you saved in interest if you pay your loan off within 5 years of your term. This can create a problem if you’ve already gotten one refinance and reset your loan’s term. Read through the terms of your last refinance and see if your loan has an early repayment penalty before you apply for a new one.
There’s no limit on the number of times that you can refinance your mortgage loan. However, individual lenders may have standards that limit your practical ability to refinance. Remember, you need to have equity to qualify if you want to take cash out against your loan. Since most lenders will only approve you for 80% – 90% of your loan’s value, it can be difficult to get more than one cash-out refinance.
But taking another refinance can be beneficial in some situations. For example, you can save thousands of dollars over the course of your loan if you make a move when interest rates drop. A second or even third refinance is also preferable to a foreclosure if you cannot make your payments.
You might also want to refinance again if you qualify for a loan without private mortgage insurance. Remember that you need to pay for closing costs each time you refinance, and your loan may also have a prepayment penalty (depending on your lender). You must also meet your lender’s individual debt, income and credit standards each time you refinance.
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