The Importance Of Equity And Your Refinance
Equity is, according to Investopedia, the difference between your homes fair market value and the outstanding balance of all liens on the property.
If this isnt your first home mortgage refinance, you should consider how equity ties into the process. If youre looking to cash out on your homes equity, you should be aware that you cant cash out on 100% of your equity at once.
Every time you cash out, you reduce the amount of equity youre able to use for future refinances or home equity loans.
So, legally, theres no limit to how many times you can refinance your home as long as theres equity to borrow against.
Benefit From A Lower Rate
Lets say you closed on your home in the summer of 2019 and settled for a 4% interest rate. Fast forward one year later and you see that rates are more than a percentage point lower. Even though youve only been in your home for a year, you may want to consider a refinance.
Imagine saving hundreds each month simply by refinancing your mortgage. You can use the extra funds to pay down high-interest debt, build up a savings account, or cover the costs of a future home improvement project. Believe it or not, lowering your rate by a fraction of a percentage could provide much-needed financial relief.
What To Consider When Refinancing More Than Once
Refinancing is a big financial move that shouldnât be taken lightly. Here are some factors to consider when youâre figuring out if it makes sense to refinance a mortgage multiple times:
- Your goals: Why do you want to refinance your home? Is it to help you save money or stay on top of your monthly payments? Do you plan on investing the money from a cash-out refinance to increase the value of your home?
- Cost and fees: Refinancing comes with fees, so make sure that youâre able to afford the costs. Youâll also want to ensure that you can recoup those costs and eventually save money.
- Your credit score: Your credit score will take a hit when a hard inquiry shows up on your credit report. Also, youâll likely get a better interest rate if you have a good credit score, so itâs smart to try boosting your score before applying for a refinance.
- Refinance requirements: The requirements for a refinance generally include a minimum credit score, a maximum DTI, a minimum level of equity in the home, and a waiting period between refinances for certain loans.
- Break-even point: If you plan on moving soon, then your refinance might end up costing you more than you save.
- Prepayment penalties: If your lender charges prepayment penalties, make sure to run the numbers and check whether itâs worth refinancing. You could also negotiate with your lender to see if any penalties can be waived.
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Is There A Limit To The Number Of Times You Can Refinance
The good news is, there is no rule that specifies a maximum number of times a homeowner can refinance their loan. As long as a property owner is able to get approved for a refinance loan, they can move forward with doing so. And, applying for past refinance loans generally shouldn’t affect that approval — as long as the homeowner generally has good credit and solid proof of income.
Of course, while you can refinance as often as you want, that doesn’t mean it’s practical to take this financial step very many times. There are a few reasons for that.
First, the truth about refinancing is that it comes with a lot of upfront costs. You’ll have to pay various fees including mortgage origination fees, appraisal costs, and other closing costs — and these can add up to thousands of dollars.
Now, paying thousands in fees up front can still make financial sense as long as the refinance loan will save you enough to eventually cover the closing costs and leave you better off. But if you refinance again too soon after doing so initially, you may not have time to break even on the first set of closing costs before you incur a second one.
Refinancing also makes sense only when you can drop your interest rate. Although interest rates have been falling, it can take time for dramatic shifts in rates to occur. If rates aren’t much lower than the rate on your current loan, it wouldn’t make sense to go through the trouble of refinancing your mortgage.
When Is The Right Time To Refinance Your Mortgage
Since the decision on whether to refinance your mortgage will often come down to the three benefits mentioned above, its important to truly understand what you hope to achieve with a refinanced home loan. If youre able to accomplish one or more of those three things, then it might be a great time to refinance your mortgage.
No matter what youre hoping to gain from refinancing your mortgage, the best time to do it is when mortgage rates are lower than what they were when you got the original mortgage. Currently, mortgage rates are at historically low prices, which makes it a great time to refinance your home and save money.
In addition to paying attention to mortgage rates, you also might want to consider refinancing your home when your credit is in a much better place than it was when you got the original mortgage. If youre able to get your credit score up to 740 or higher, then you should be able to lock in a much better rate with a mortgage refinance.
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How Often You Can Refinance Government
If you currently have a loan backed by the Federal Housing Administration , U.S. Department of Veterans Affairs or U.S. Department of Agriculture , lenders will need information about how recently you closed on the mortgage youre refinancing.
The date is used to determine whether you meet the seasoning requirement, which is the number of payments made since you took out your current FHA, VA or USDA loan. These programs also set strict limitations on your breakeven point which is how long it takes for you to recoup your refinance closing costs.
The table below shows the minimum waiting periods and breakeven requirements for three popular government streamline refinance programs: the FHA cash-out refinance, the VA interest rate reduction refinance and the USDA streamlined assist refinance.
Have You Built Enough Equity To Refinance
Another reason to refinance again is to do cash-out refinance. This is where you borrow money from the home equity youve built up in your home and receive the difference in cash. This can be helpful to pay off other expenses youre struggling to cover, such as college tuition or medical bills, or to pay for home improvements, upgrades, or additions so the home better meets your needs.
However, most lenders require you to have at least a 20% equity in the property to refinance. And building equity isnt something you can do overnight, which might mean youll have to cool your heels for a while before you can refinance again.
You have to build up enough equity in the home to qualify for a cash-out loan, which can take time, Bellingham says.
Although you can sometimes refinance with less than 20% equity, your interest rate may be higher as a result. Plus, each time you refinance, you reduce the amount of equity you can tap into in the future. Make sure to take this into account when deciding if another refi makes sense for you.
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It Depends On Your Current Loan
If you have a conventional mortgage, there are typically no restrictions between when that mortgage was closed and when you can refinance as long as youre not taking cash out.
Government-backed loans impose a refinance waiting period between six and seven months, depending on the loan issuer. Additionally, borrowers must make payments on time for at least three months, and there must be a demonstrated benefit to the refinance .
Taking A Lower Interest Rate
Have interest rates lowered since you got your refinance? You may want to refinance again to take advantage. You can almost always save money if youre able to lower your interest rate without changing the term of your loan.
Just a small change in your interest rate can save you hundreds, or even thousands, of dollars. For example, lets say you currently have a 20-year mortgage loan with $150,000 left on your principal and you pay an interest rate of 4.5%.
You have the chance to refinance your loan with the same terms and an interest rate of 4% APR. If you dont refinance, you pay $77,753.84 in interest by the time your loan matures. If you take the refinance, you pay $68,152.95 total in interest. Lowering your interest rate just 0.5% means you’ll save over $9,601 in interest.
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How Often Can You Refinance A Mortgage
There is no limit to how many times youre allowed to refinance a mortgage, though a lender might enforce a waiting period between when you close on a loan and refinance to a new one. Often, lenders have whats called a seasoning requirement a period of time you need to wait before refinancing, generally at least six months.
However, that might only apply if youre refinancing with your current lender you could find a new lender that is willing to do the refinance sooner and skirt the six-month rule altogether. Still, if youre considering a cash-out refinance, the waiting period, in many cases, is firm at six months.
For government-insured mortgages, there are different requirements:
- Borrowers who have an FHA loan and are looking to do an FHA streamline refinance are required to wait 210 days from the closing date of the first mortgage, and six months from the due date of their first mortgage payment, before being able to refinance.
- For an FHA cash-out refinance, there is only a six-month payment requirement.
- Borrowers with a VA loan considering a VA streamline refinance are required to wait either 210 days from the date of their first mortgage payment or the date the sixth mortgage payment is made, whichever is later.
- For a VA cash-out refinance, the required waiting period is also at least 210 days from the closing date of the first mortgage.
Your Credit Score Increased A Few Points
Refinancing after your credit score improves is another way to score a lower rate. However, the exact score doesnât matter much itâs the credit tier you fall in that really matters.
For instance, borrowers with a score that falls between 800 and 850 are considered to have exceptional credit, though a lender may consider anything between 750 to 850 as top-tier. So if your credit score bumps up from 780 to 800, itâs something worth celebratingâbut you likely wonât qualify for a lower rate based on that score alone. On the other hand, going from a âfairâ score of 650 to an exceptional 800 could definitely help you save money.
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What Are The Main Refinance Requirements
First things firstare you even qualified to refinance? Just like when you originally worked with a lender to buy your home, youll need to go through an approval process to refinance the terms of your mortgage. This involves many of the same steps as your original financing experience like sharing financial documentation with your lender.
Youll also need to meet some basic minimum requirements to be eligible for refinancing. For conventional loans this typically means a credit score of at least 620 and a DTI ratio no higher than 43%. On top of that, youll likely need at least 5% equity in your home. If your LTV ratio is less than 20%, you may not be able to qualify for quite as competitive interest rates, and you may have to pay mortgage insurance to offset the additional risk of your refinance. To get a more detailed breakdown of documentation and refinance requirements, review this checklist.
Turn Equity Into Cash
If your homeâs value has increased since you bought it or last refinanced, you can refinance again to cash out some of the equity. This involves refinancing to a loan in the amount of your existing mortgage, plus the amount you want to borrow against your equity. Generally, you want to maintain at least 20% equity after refinancing.
Common reasons for cash-out refinancing include paying off higher-interest debt , financing home improvements or starting a business. Itâs important to understand that your loan will increase in size and youâll also have to pay closing costs and other fees, which means your monthly mortgage payments and total interest paid also will increase with this option.
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Your Credit Rating Rose
The interest rates you get for your mortgage depend mainly on your credit score. While your credit score may not usually change quickly, it could surge after clearing disputed charges or paying off large debts. Also, the more time that passes after a bankruptcy, the less of an effect the event has on your credit. Talk to your lender if your credit score has risen significantly since you took out your home loan to see if you can qualify for lower rates through refinancing with your new, better credit score.
Process Of Refinancing A Mortgage
The process of refinancing has multiple steps. You will need to prepare yourself for the process, so you dont feel surprised or unprepared by anything. Researching the process and your options will make you better prepared for choosing the right lender and finding the best interest rates.
First, get an idea of your homes worth and determine how much equity you have. Generally, lenders wont refinance if you have less than 5% equity in your home. Ideally, you want 20% equity or more in your home for the best chances at qualifying for a refinance.
A lot of the refinancing process requires research. Not all lenders offer the same interest rates, and your credit score and other personal factors will affect how much you pay. You need to compare rates from several lenders and find out what fees they charge. Check with the mortgage companies to see what paperwork they need hard copies of. Many can connect electronically to various financial institutes, so you dont require printouts of financial documents.
Once youve done your research, apply for a loan to get an estimate for refinancing. You should get an estimate within three days. If you approve of the terms, the loan process continues with the lender carefully reviewing your application documents.
At this stage, you need to get an appraisal. In some cases, your lender may set up this inspection or ask you to do it. After appraising the home, the reviewer will send a report about the homes value to both you and the lender.
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Original Vs New Monthly Payment When Refinancing
Dont just look at the monthly payment, though. How much will each loan cost you in total interest assuming you pay off the mortgage and dont sell your home or refinance again?
To get this information, select the calculators option to view the amortization table. At the bottom, youll see the total interest for the new mortgage. Write that number down.
Then, do a new calculation with the mortgage calculator. Enter your:
- Original principal amount
- Current interest rate
- Current loan term
Then, view the amortization table for that calculation and see what your current total interest over the life of the loan will be. How much will you save in the long run by refinancing?
Turn Your Homes Equity Into Cash
Though not always the wisest option, as it comes with some added expenses and reduces your homes overall value, it could save you if you find yourself in a severe financial bind.
Some home loans require a seasoning period before youre able to refinance, so if you recently bought your home, make sure its been long enough to refinance.
A seasoning period is when you purchase your home and when your lender says its okay to refinance. Your bank just wants you to build some equity first. But its crucial to note that this period can be as little as six months.
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Lower Your Interest Rate
The most common reason to refinance multiple times is for a lower interest rate.
If you took out a loan when rates were higher or if youve improved your credit score since you bought the home you may be able to lower your mortgage rate. This will decrease your monthly payments and can potentially save you tens of thousands of dollars over the life of the loan.
For instance, a 30-year fixed-rate loan of $300,000 with a 6% interest rate costs roughly $347,500 in interest over the life of the loan. However, if you refinance to a 4% rate, the total interest cost drops to around $215,000. Depending on how far you are into the loan when you refinance, you could save over $100,000 over 30 years.
Get A Lower Interest Rate
Refinancing your home might get you a lower interest rate, which could mean less money youll have to repay in the long run. If youre settling down in one spot for a while, this could be a great option, along with increasing your loan term.
If your credit score was lower when you purchased your home, or if interest rates were higher back then, it might serve you well to refinance now. Having a higher credit score now will set you up for landing a better deal on your home loan.
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