Signing the paperwork for a multi-decade mortgage can be a daunting experience. You might ask yourself, “Am I committing to paying the same high monthly amount for years?” Fortunately, the answer can be a resounding “no,” and refinancing your mortgage can be a strategic alternative to lower your interest rate and overall cost.
Realizing savings is especially possible during COVID-19. With falling refinance rates since the start of the pandemic, the nation is in a refinancing boom. Homeowners who refinance at this time can potentially reduce their mortgage interest rates by substantial amounts, reduce private mortgage insurance (PMI) payments, or cash out equity from their existing mortgage.
However, homeowners may be skeptical of refinancing now, biding their time for a more appropriate opportunity to bag an even lower interest rate. If you wait too long, could you lose the chance to refinance at a better rate? And if you refinance now, or have already done so but realized too late that rates are still falling, how often can you refinance your home?
Here are some considerations to help you determine the frequency with which you can refinance your home loan, and when it may be a good idea.
You Can Refinance As Many Times As You’d Like
Generally speaking, you can legally refinance as often as you feel necessary for your financial situation. However, refinancing brings various benefits and costs, so it’s usually not about whether you can refinance, but whether it’s practical.
Your choice of whether to refinance depends on multiple factors. Aspects such as your intentions and goals, credit score, monthly payment, mortgage loan term, current average mortgage rates, and equity in your home all play a part in making a home loan refinance the right decision.
Benefits of Refinancing
One of the top reasons that homeowners opt for mortgage refinancing is to save money. Especially with this year’s pandemic, interest rates have plummeted, giving consumers potentially excellent opportunities to slash their monthly loan payments. Reducing monthly payment amounts isn’t the only way that a mortgage refinance can cut your costs.
If you refinance your mortgage, you can extend the mortgage term, reducing your monthly payment by spreading it out on a longer timeline. Other options are converting to a fixed-rate or adjustable-rate mortgage, which can offer you greater flexibility.
Additionally, suppose you realize you have at least 20% equity in your home. In that case, you may be eligible to reduce or remove PMI payments, which also serves to reduce your overall mortgage payment. If you paid less than 20% down when you took out your mortgage, this could be a great cost-saving option.
Cash-out refinances are also an option, in which you increase your overall loan amount in exchange for money in your pocket. In turn, you can use this payout for purposes such as making necessary home improvements and debt consolidation.
Costs of Refinancing
While there are clear benefits to refinancing, the above perks come with their caveats. Loan refinancing is rarely black-and-white and is based on what you are trying to accomplish.
A primary point to consider is that you need to pay closing costs when you refinance a mortgage, just as you did when you initially purchased your home. Closing costs usually are 2 to 6% of the new loan amount. To give you a simple example, if your refinanced loan is $100,000, you might pay between $2,000 to $6,000 upfront.
With such a considerable cost, it’s wise to think about refinancing when you are financially ready to do so. The good news is that when you do decide to refinance, even an interest rate decrease as small as 0.5% can mean hundreds or thousands of dollars in savings in the long term.
If your goal in refinancing is to eliminate PMI payments, it’s crucial to make sure you have enough home equity. You typically pay PMI if you make a down payment of less than 20% of the loan’s original amount, and if you still own less than 20% of your home’s equity, the decrease could be negligible or nonexistent.
Similarly, cash-out refinances may not be a good option if you lack adequate equity in your home. Mortgage lenders often don’t want to lend more than 80 to 90% of your home’s equity to cash out since this increases their risk. If you refinance your loan to cash out, then realize you need to do the same a few years later, you may have ruined your chances by failing to increase your home equity the amount that you needed to.
Lastly, depending on your lender and the specific mortgage terms, you may be subject to prepayment penalties. These are as they sound–you can see penalties for paying off or refinancing your original loan. The best way to check this is to review your original loan paperwork or ask your lender directly.
Even though there are often no limitations to how many times you can refinance, your current mortgage type may restrict your decision. The best examples of this are government-backed loans such as FHA and VA loans, which may require that you wait at least six months before refinancing.
Of course, mortgage lending practices can vary from lender to lender. Some lenders may require a waiting period regardless of your original loan type, which depends on the amount of risk they are willing to take on.
What You Can Do
The best thing you can do is start thinking about whether it may be beneficial for you to refinance your mortgage based on your circumstances. It can also give you peace of mind to know that if you refinance your home loan, you can still take specific options if you learn that you may need to refinance again soon.
At T&I Credit Union, we prioritize your financial wellbeing, offering plenty of guidance and tools like refinance calculators. Whether you’re in the market for a home loan, refinance, or a bank account, we have you covered. Contact us or visit our website to learn more about how working with us can lead to more monetary stability.