If you are a homeowner and looking to take money out, you may be wondering how often can you refinance your home. The answer may surprise you: there’s no legal limit that restricts how often you can refinance your mortgage. Some homeowners have refinanced their mortgage multiple times within just a few years of each other.
That said, there are some facts or specific situations where you as the homeowner will not want to refinance often, as there are many factors to consider when choosing a mortgage. Below, we’ll discuss some of the options that homeowners have when refinancing their house, as well as some of the reasons it could be a bad idea.
Type of mortgage refinancing
To leverage any refinancing opportunity, you must know what options are available and apply them to your case. Such options come from different sources and set additional conditions. See below is a list of the most popular options.
Cash-out refinance
A cash-out loan is a refinance method that substitutes your existing mortgage with a larger home loan, thereby allowing the homeowner to receive a windfall of cash. A cash-out refinance has the benefit of providing the homeowner with much-needed funds to cover other expenses. The borrower is essentially taking equity out of their home in the form of cash (likely to pay off other higher-interest debt).
Some homeowners use that extra cash to cover home improvement expenses, but others use it to protect other personal financial needs. For example, if the homeowner has higher-yielding debt (like credit cards) it may make sense to consolidate that debt with a refinance. Before you refinance with a cash-out method, we recommend that you evaluate your credit score. If your credit rating has been wavy for some time, you may not get a good enough interest rate once you refinance.
Term change refinance
With a change in the refinance term, homeowners can switch from a fixed to an adjustable-rate mortgage (ARM), or vice-versa. It also allows you to change the amortization period and other features of your home loan. As a result, you could save thousands of dollars and lower your interest rate.
But before cashing in on a refinance, know the rules governing your movement to another mortgage. It will help you move from the original mortgage faster and get a new loan without stress.
Ways to refinance a mortgage
Here are just a few ways to consider a refinanced mortgage:
- Taking out equity: Also called a “cash out refinance”, if you have built equity in your home, you may be able to cash out on that to get access to money.
- Refinance to a shorter-term period: You may be able to change what you currently have to a shorter-term mortgage agreement (for instance, changing from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage.
- Refinance to a lower interest rate: If you have a higher interest rate and the market has led to lower rates, you may be able to refinance to reduce how much you pay in interest.
It is often a good decision to refinance a mortgage if it means it can benefit you. For instance, if a homeowner will pay less over time or have a lower monthly payment, it may make sense to refinance. In some situations, a cash-out refinance option may allow a homeowner to get money and perform remodeling or improvements on their home.
Good reasons to refinance your mortgage
Here’s why it may be a good idea to get a new mortgage to replace your old loan:
- Switching from an adjustable-rate mortgage to fixed-rate mortgages
- Reduce the loan amortization period (note that your interest rate may spike with such a move)
- Dissolve a partnership, go through with a divorce, etc.
- Take money from the equity built in your home. Taking equity from your home could go towards sundry expenses. Most lenders will only allow homeowners to take equity from their home when it stands at 20%.
Why it may be more harmful to refinance
It’s not always a good idea to refinance a mortgage loan. Here are a few reasons it may be more harmful to refinance:
- Think twice before you refinance to consolidate debt. Paying off debt with money you get from a refinance can set your home up as collateral, which could result in you losing your home.
- Don’t refinance into a longer loan for a lower payment. Not only does refinancing take so long but you may end up paying more over time.
- Don’t refinance if you don’t know the costs vs. how it can reduce your monthly payments. The costs associated with refinancing may make it more upfront or lengthen your term.
- Don’t refinance to take advantage of deals offered to you by your lender. If it seems too good to be true? It probably is.
What to consider when refinancing
If you are a homeowner and want to refinance, make sure you keep some very important things in mind. First, make sure that your initial mortgage loan can be improved with a new refinanced mortgage. If it doesn’t make sense for you to do so financially, you should not refinance.
One other important factor to consider is the cost to actually refinance. While you may save on monthly payments or create a shorter term, you must be prepared to refinance at the very beginning. When you refinance, there are a few things that can complicate the process, including the following:
- You may be required to pay closing costs again.
- You may face prepayment penalties if your current mortgage has these terms.
- You may need to meet any qualifications your lender has to refinance.
Do your research before making the decision to refinance. There’s no limit on how often you can refinance, but it doesn’t always make sense, so it may help to wait until the time is right.
