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Updated on Friday, February 1, 2019
You may be considering refinancing your home mortgage for the second or third time. For many homeowners, now is a good time refinance because you can lock in a favorable interest rate before rates increase, and lower your monthly payments. Here is what you need to know before you pursue that process.
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Is there a limit on how many times you can refinance?
Refinancing more than once is not unusual for homeowners, especially those who have a jumbo mortgage—a loan that exceeds $484,350 in every state except for Alaska, Guam, Hawaii and the U.S. Virgin Islands where it can exceed $726,525, based on the 2019 conforming loan limits set by the Federal Housing Finance Agency (FHFA).
Mortgage lenders typically do not set limits on the number of times a mortgage can be refinanced as long as your credit score, property value and debt-to-income (DTI) ratio have not drastically changed. Homeowners should always compare rates before they begin the refinancing process.
Refinancing a mortgage means that your current mortgage will be paid off. In return, the homeowner obtains another mortgage, typically with a lower interest rate, in hopes of lowering their monthly payments.
The two major reasons many homeowners will consider refinancing is to seek a lower interest rate or to obtain a fixed-rate mortgage because their current adjustable-rate mortgage is set to end soon.
“As long as you make on-time payments, you can refinance more than once,” said Tendayi Kapfidze, chief economist for LendingTree, which is owned by MagnifyMoney. “Any time you take out a loan, you get a slight hit to your credit score, but it recovers within a few months. The function of your credit score is to get you access to credit. Your credit score is never more valuable than when you are taking out a home loan since it’s the biggest loan people take out.”
Refinancing means you will restart the payment period all over again. For instance, if you are taking out a 30-year fixed mortgage, the countdown to when your mortgage is paid off starts over and extends to that point in time.
Refinancing is very similar to the process that you undertook when you first received a mortgage. It can take several weeks or longer to be approved because the lender will check your credit score and other financial information such as your income, even if the process is conducted online. Refinancing is not inexpensive; you will have to pay several fees that can add up to several thousand dollars. Expect to pay 3% to 6% of your outstanding principal in refinancing fees, plus prepayment penalties, if they exist in your original mortgage.
When it makes sense to refinance again
Lower interest rates are not the only reason to refinance your mortgage. One good rule of thumb to follow when it comes to deciding whether refinancing makes financial sense is that a new loan should be 50 basis points or 0.50% lower than your current mortgage rate, Kapfidze said.
“If each time you refinance you are getting a better rate and end up in a better financial situation, you should definitely consider it, especially if rates are in a downward trend,” he said. “The only thing is that there is cost each time you refinance — make sure you don’t pay so much in refinance costs that it negates the benefits. Only consider refinancing if mortgage rates have dropped by 50 basis points or 0.50% from your current rate.”
Before you decide to refinance your current mortgage, you should consider these factors first.
- Whether it lowers your interest rate on a fixed-rate mortgage
- Your eligibility for refinancing
- Changes in your credit score
- The length of the loan
- The amount of equity in your home
- How long you plan on living there
- Whether it makes sense to switch your adjustable-rate mortgage (ARM) to a 30- or 15-year fixed-rate mortgage
Mortgage rates still remain historically low, but if your mortgage rate is high, refinancing is still an option. Using historical mortgage rates provided by the St. Louis Federal Reserve Bank, we can look back almost a decade ago to Jan. 14, 2010 and see that the rate for a 30-year fixed mortgage was 5.06% compared with 4.45% on Jan. 10, 2019.
Refinancing when the economy is in a rising interest-rate environment like the one we’re in now still often makes sense because mortgage rates are benchmarked to the 10-year Treasury note, which is a longer-term rate, Kapfidze said. One misconception that many people have is believing that mortgage rates are tied to the fed funds rate, which is a short-term rate that the Federal Reserve can raise or lower repeatedly to affect the cost to banks of borrowing, he said.
However, borrowers should not rush to refinance their mortgages because interest rates are rising, because mortgage rates often do not increase at the same time, Kapfidze added.
Refinancing your mortgage is not a simple process, and it includes several fees that can add up to thousands of dollars. Because all lenders charge different rates for their fees, it is a good idea to shop around and find out which ones offer discounts.
What are closing costs?
The refinancing fees include the following:
Loan origination fee: The fee that the lender or broker charges to evaluate and prepare the mortgage loan. The cost is typically a maximum of 1.5% of the loan principal.
Application fee: A non-refundable fee that usually ranges from $75 to $300. This includes the cost of checking your credit report and score and processing your loan. Even if you are not approved for a mortgage, you likely will have to pay this fee.
Points fees: Also known as a loan discount points, they lower the interest rate of the mortgage. A point is equal to 1% of the amount of your mortgage.
Attorney fee: Charged by the lender to pay for an attorney or title company conducting your closing. This fee is typically $500 to $1,000.
Appraisal fee: A home appraisal tells lenders your home’s value is at least the same as the amount of the loan. The appraisal fee is sometimes part of the application fee, depending on the lender or broker you chose. If your home was appraised recently, the lender might consider waiving its requirement for another appraisal. The cost usually is $300 to $700.
Inspection fee: The cost to check if a home has pests, such as termites. This could include a more in-depth analysis of the structural condition of the home. In some states, the lender will also want to inspect and test the septic system and well and water system. The fee is $175 to $350.
Title search and title insurance fees: These fees cover the cost of researching the title on the home from property records. The lender wants to ensure that you are the owner of the home and to see if there are any liens against the property. The title insurance protects the lender in case any mistakes emerge when they are conducting a search for your title. The cost is typically $700 to $900.
While many lenders will offer “no-cost refinances,” that does not mean all your fees are waived. Instead, these lenders allow the upfront fees to be paid throughout the term of your loan, either by setting a higher interest rate or increasing the amount of the loan.
The higher interest rate will be paid throughout the entire term of the loan, often for 15 or 30 years. This option usually means the homeowner spends more money in the long run because interest is being accumulated for the duration of the loan.
When the refinancing fees are included in your new mortgage, they are “rolled into” or “financed into” the principal amount. Even though you will not have to pay thousands of dollars of fees right now, you will be repaying the fees along with interest for the next 15 or 30 years.
Consider your financial goals before refinancing
Before you start the process of refinancing again, consider your financial goals. If your goal is to have lower monthly payments, refinancing is often a good tool to choose.
A homeowner who wants to pay off his or her mortgage as soon as possible should consider refinancing their 30-year fixed mortgage into a 15-year fixed mortgage, or they could simply make extra payments to avoid paying the closing costs associated with a refinance. If paying off your mortgage is a priority, then refinancing may not be the best option because it extends the number of years you’ll be on the hook for payments.
Reasons not to refinance
- You have had your mortgage for many years
- You don’t plan on being in home for the long term
- Your credit score has declined
- You can’t afford closing costs on refi
- Your debt has risen
- Negative amortization has occurred, in which you owe more on your mortgage than you originally borrowed
- Your mortgage has a prepayment penalty
- Your salary has declined
- The house’s valuation has declined
- You have an existing home equity line of credit (HELOC)
Refinancing can be a good option for homeowners who are seeking lower monthly payments and plan on living in their home for several years. Determine if the additional costs of refinancing are worth it, and shop around for the best mortgage rates and lowest fees.
Use a refinancing calculator to see how much your lower monthly payments will be once the refinancing fees are calculated, but be aware: the process remains lengthy, even though many companies conduct all the paperwork electronically now.
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