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How Often Can You Refinance?

Saturday, Oct 1, 2011

How soon can you refinance your mortgage again if you've already done it recently? With interest rates in a free-fall and setting new records, it's a highly relevant question.

The answer is, there's really no limit, at least under the law. The more relevant question is, how long *should* you wait before refinancing again? And how soon will your lender allow you to get out of your current mortgage?
 
In fact, the homeowners who are in the best position to refinance right now may be the ones who already refinanced in the last year or so. Virtually everyone wanted to take advantage of what were then historically low rates in the spring of 2009 and fall of 2010, so just about the only ones who didn't refinance are the ones who couldn't because they were underwater on their current mortgage - and probably still are.
 

Look out for prepayment penalties

 
There are a few things to beware of when refinancing quickly after taking out a previous mortgage. The first is that your existing mortgage may have a prepayment penalty, particularly if you took it out less than one year ago. If your current mortgage was a "no cost" mortgage or refinance, you'll probably have a prepayment penalty if you refinance within less than three to five years.
 
Prepayment penalties can be steep - often equal to six month's interest charges on your current mortgage. That can make refinancing a whole lot less attractive, so you want to be sure to take it into account when figuring potential savings from a refinance.
 
Also, some banks may be reluctant to refinance a mortgage that's less than a year old, particularly if you're refinancing through the same bank.
 

3 major concerns - interest, costs and time

 
Aside from that, the only real limit on how soon you can refinance is whether you can save money by doing so. That's mainly a function of three things: 1) your interest rate, 2) closing costs and 3) how long you expect to live in the home.
 
The general rule of thumb is that you don't refinance unless you can save at least a full percentage point off your current interest rate. In reality, however, the key question is whether you can reduce your interest rate enough to offset your closing costs - and that depends on how long you plan to stay in the home.
 
Here's how it works: Suppose you've got a $250,000 30-year mortgage at 4.5 percent. Refinancing at 4.0 percent, with $5,000 in closing costs (assuming you're keeping the same payoff date and rolling the closing costs into the loan balance) will save you about $50 a month. So it will take you 100 months, or over eight years, to recoup your closing costs (the break-even date). That's not a good deal unless you're planning to stay in the home a long time.
 
The above example also helps show the importance of controlling your closing costs. If you can negotiate your closing costs down to $3,750 (1.5 percent of the loan balance, instead of 2.0 percent), you'll recoup your costs in a little over six years, making the deal much more attractive. Similarly, if your closing costs are $7,500 (3.0 percent of the loan), it's going to take you almost 13 years break even, unless you get a much bigger reduction in your interest rate.
 

What about "zero-cost" refinances?

 
Many people are attracted to so-called "no-cost" or "zero-cost" refinances, where there is supposedly no charge to refinance. In reality, the closing costs are simply rolled into the new loan in the form of a higher interest rate. These aren't a bad deal if you're only planning to own the home for a short time, but if you're planning to remain there longer than 5-8 years, you're usually better off rolling the fees into your loan balance and taking a lower interest rate. In addition, no-cost mortgages almost always include prepayment penalties to ensure that you keep the mortgage long enough for the lender to recoup the closing costs.
 
If you're looking to shorten your mortgage term - for example, going from a 30-year mortgage to a 15- or 20-year one (which offer much lower rates right now), you want to look at whether you can comfortably afford the accelerated payments and what your interest savings would be over the life of the loan or the period you expect to own the property, whichever is shorter.
 

Can you refinance too often?

 
Some people are concerned that if they refinance too often, they may keep racking up closing costs that increase their mortgage balance faster than they can reduce it over time. Often, they also end up re-extending their mortgage term, which cuts into any savings in interest they realize.
 
There's no easy way to determine this, but generally you want to make sure you're coming out ahead of where you'd be if you stayed with your any previous mortgages. If, after accounting for costs, interest savings and extended amortization from all subsequent refinances, you find that you'd just be digging yourself deeper into a hole, you probably shouldn't refinance.

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