With mortgage interest rates at historic lows around 3%, you may be thinking of seizing the opportunity to refinance—maybe even for a second or third time.
Technically speaking, there’s no limit to the amount of times you can refinance your mortgage. However, experts say you have to look beyond the interest rate to decide whether refinancing makes financial sense for you.
Jason Ball, a certified financial planner and founder of Jason’s Fin Tips, recently looked into refinancing. The 2.85% rate on a 30-year loan was tempting compared to his current rate of 3.15%. He didn’t move forward, though. Why not? The closing fees.
“In my case, the refinance would have lowered our monthly payment, but it added six years to the loan. The fees to originate the loan were simply too much to overcome the lower interest rate offered,” says Ball.
When to Consider Mortgage Refinancing
Here are some reasons to consider going down this path, whether it’s your first, second, or third time.
- Lower Interest Rate. If interest rates have dipped since you got your mortgage, that’s a starting point. A good rule of thumb is if the new interest rate is at least 1% lower than what you have, you might want to talk to your loan officer about refinancing, says Andrina Valdes, COO of Cornerstone Home Lending.
- Credit Score. If your credit score has improved since your last mortgage loan originated, you may want to consider getting pre-qualified for a lower interest rate. A good credit score ups the odds that you’ll qualify for the best current interest rate.
- To lower your monthly payment. If your financial situation has changed where you can no longer afford your monthly payment, refinancing could be an option to keep you in your home and avoid foreclosure.
- You need cash. If you gained enough equity in your home, “you could tap into it for household expenses, vacations, education, etc.,” says Valdes.
- Lock in a fixed rate. Perhaps you have a variable rate mortgage, and interest rates are rising. It could be worthwhile to refinance and lock in the lowest fixed rate you can get.
- Shorten the term. If you are looking to pay off your home sooner than your original loan and lessen the amount of interest you pay overall, you can refinance to switch from a 30-year for a 15-year mortgage.
- Consolidate debt. Potentially roll credit card, car loan, and student loans into one monthly payment using a cash-out refinance option.
How Many Times Can You Refinance Your Home?
If you ask financial experts how many times is too many, the answers vary.
If you’re looking to take advantage of a lower rate, and the current rate isn’t at least 1% lower than your current mortgage rate, refinancing may not make financial sense.
When considering refinancing, the most attractive rates are available to homeowners who have at least 20% equity in their home. If you are close to this milestone, it could benefit you more to wait to refinance until you reach 20% equity.
One way to determine the worth of refinancing is to calculate your break-even point. This is the number of months it will take you to recoup the upfront costs of refinancing. In the case of multiple refinances, it probably doesn’t make sense to pay another round of upfront costs before you first recoup from the previous refinance.
Here is a scenario to help paint the picture.
- Original home purchase: $300,000.
- Principal loan balance after down payment: $275,000
- Interest rate: 4.5%, fixed, over 30 years.
- Monthly mortgage payment: $1,393
Here what the first refinance would look like 15 years into the loan.
|Old Monthly Payment (with previous rate: 4.5%)||$1,393|
|New Monthly Payment (with new refi rate: 3.5%)||$1,072.32|
|Total Savings Over the Life of Loan||$57,721.71|
|Refinance Term||15 Years|
|Break-Even Period||18.75 Months|
In the first refinance scenario, the monthly payment reduces by $320 a month. However, closing costs were $6,000. You can find the break-even period By dividing the closing costs by the monthly savings. In this case, it will take 18.75 months, or about a year and a half, to recoup your upfront costs.
Now, let’s say after 12 months later, you refinance again with an even lower interest rate from 3.5% to 2.89%:
|Old Monthly Payment (with previous rate: 3.5%)||$1,072.32|
|New Monthly Payment (with new rate: 2.89%)||$907|
|Total Savings over the Life of Loan||$24,834|
|Refinance Term||15 Years|
|Break-Even Period||29.49 Months|
There may be another reduction in monthly payment with the second refinance, but shelling out thousands in closing costs and refinancing again only 12 months later – before you’ve fully recouped the first refinance is over – adds another 29.49 months, or about two and a half years, to your break-even period.
Sometimes, it doesn’t make sense to refinance just because you can get a lower interest rate. The rate reduction needs to be worth it. In continuation of the above example, three years since the last refinance, there is an opportunity to refinance again from 2.89% to 2.5% for 15 years, adding three years to your 12 remaining loan years.
|Old Monthly Payment (with previous rate: 2.89%)||$907|
|New Monthly Payment (with new rate: 2.5%)||$672|
|Total Savings over the Life of Loan||$38,587|
|Refinance Term||15 Years|
|Break-Even Period||15.9 Months|
It’s been a little over six months since the break-even period ended following the previous refinance. But you’re adding more time to the loan life and won’t see savings again until 15.9 months. Each time a refinance occurs, it’s important to realize that your monthly payment may decrease, but you are extending the loan timeline. Lowering monthly costs doesn’t always equate to immediate savings.
Is It a Bad to Refinance Multiple Times?
“As long as it makes financial sense and saves money, it’s not wrong to refinance multiple times,” says Dan Green, CEO of Homebuyer, a national mortgage lender. “In a falling interest rate environment, it’s common for homeowners to refinance at least annually.”
Refinancing more than once per year “seems counterproductive unless there are extenuating circumstances,” says Patrick Rush, author of “Gain Big and Give Back: Financial Planning with Intention,” and CEO of Triad Financial Advisors. But as long as there is a tangible benefit, you spread them out appropriately, and you don’t mind all the paperwork, then go for it, says Rush.
Be as sure as you can that you will stay in the house for several more years, experts say. “If you’re planning on selling the property in the near future, doing a refinance in most cases doesn’t make sense unless you’re getting a significant rate cut,” says Bill Samuel, owner of Blue Ladder Development, a Chicago-based home buying company. Conventional wisdom is to avoid refinancing if you don’t plan to remain in the home for longer than the break-even period.
Also, be cautious with refinancing to take cash out. A cash-out refinance can make sense once, but more than that will greatly reduce equity, says R.J. Weiss, a certified financial planner and founder of the personal finance site The Ways to Wealth.
Make sure to review your financial situation with your lender and thoroughly weigh the cost and benefits.