How soon can you refinance your mortgage?

by Vic Bassey

You can refinance your mortgage as quickly as you desire. In fact, there is no reason that you could not drive from the closing on your mortgage to a closing for a refinance loan on the same day. That being said, good timing is essential to refinancing in a way that can save you money or help you to get out of debt sooner.

Determining When to Refinance Your Home

The best time to refinance your home is the time at which it will save you the most money. While one rule of thumb is to refinance if your interest rate will drop by at least two percent, it could make sense to refinance for less savings if you can transition from an adjustable to a fixed rate or if you need to pull cash out of your home for improvements or repairs. If you will be staying in your home for a long time and can take out a no-cost refinance, it may make sense to refi for an even smaller decrease in interest rate, as well. Ultimately, the best way to find out is to use our mortgage calculator or work with a banker or mortgage broker that can run the numbers for you.

On the other hand, if your loan is just a few years from being paid off, refinancing it just to save money on interest may make much less sense. If you plan to move out of your home soon spending money to refinance it could also end up being a waste since you incurred the cost of refinancing up front but will pay the mortgage off before you get the benefit of the lower rate.

How Often Can You Refinance Your Home?

Just as you can refinance whenever you want, you can also refinance as many times as you want. There are no laws regulating your refinance frequency, although you should use good business sense when refinancing.

Year Payoff ($) Payoff (%)
1 $2,951 1.48%
3 $3,260 1.63%
5 $3,602 1.80%
10 $4,623 2.31%
15 $5,933 2.97%
20 $7,614 3.81%

Doing a refi carries a hidden cost which comes from the way that mortgages are amortized. Amortization is the process of spreading out payments over time and allocating them between paying interest and paying down the loan’s principal. When a loan is relatively new, you pay a great deal of interest and very little principal. As the loan ages, the interest goes down and your principal payments go up as demonstrated in the table on the right. Every time you refinance your home you restart the clock and pay less principal. This makes it take longer to pay off your home.

One way to mitigate this problem is to refinance to a shorter-term loan. For instance, a 10-year-old $200,000 30-year mortgage at seven percent carries a monthly payment of $1,331. If you were to refinance the remaining $171,953 balance for 20 years at 5 percent, you would pay the loan off in the same amount of time and save almost $200 a month based on the new payment of $1,135. If you found a lower rate loan, you would save even more.

Special Situations

Prepayment Penalties and Loan Costs

If it will cost you money out of pocket to refinance your loan, give it some extra though. Whether you have to pay a prepayment penalty to get rid of your old mortgage or you need to pay points or fees to get a new mortgage, spending money today to save money in the future is not always a good idea. If you move or payoff your mortgage, you may not get the money you spent back. Can you wait a short period of time and have the prepayment penalty go away? Can you find a different lender who will offer you a comparable rate without you incurring out-of-pocket costs? Doing either of these things can make your refinance more profitable.

How Soon Can You Refinance an Adjustable Rate Mortgage

If you have an adjustable rate mortgage and plan to stay in your house for a long time, it makes sense to refinance to a fixed rate mortgage even if your payment goes up. Over the past 30 years, the average rate on a 30-year mortgage has been 8.12 percent based on historical data from the Federal Reserve. If you can lock in a lower rate and eliminate the risk of having an ARM which could adjust upwards, it is worth paying a little bit more.

Credit Considerations

Your credit profile determines both your ability to refinance your home and the rate you will ultimately pay. With this in mind, if you have good credit but fear it may get worse in the future, refinance before things change. Conversely, if you know that your credit will get better in the near future waiting should save you more money than you could lose if interest rates go up in the interim.

Another related consideration is the impact that serial refinancing could have on your credit. While credit inquiries go away after a short period of time and have minimal impact, constantly generating inquiries could be more damaging. In addition, FICO scores look for established credit accounts. Constantly refinancing your mortgage eliminates the opportunity to have a single large account with a long positive history contribute to your credit score.

Ultimately, while the law and the financial industry will let you refinance whenever you want, you have to choose when and why to do it. Formulating a strategy to figure out when can you refinance your mortgage requires looking at all of the financial and lifestyle factors. If you need help, contact a banker or mortgage professional. They can both run numbers and advise you on what the best options are.

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