Long-Term Effects, Pros, and Cons of Refinancing Your Home Multiple Times

The Financial Implications of Refinancing Your Home Multiple Times

Refinancing your home for the first time would have been profitable, and you might have even pursued another refinancing after that. The new interest rate might have tempted you to refinance your loan again. Refinancing can be wise to reduce monthly payments and long-term costs, but the question is how often you should refinance your home.

Is there any limit for refinancing, or are there potential pitfalls for refinancing multiple times?

How Many Times You Can Refinance Your Home?

  • The first thing is there is no limit to refinancing your home or mortgage, but it does come with conditions.

  • Money lenders require at least six months, which means you must wait at least six months from the closing date of your current loan before refinancing with your existing lender. However, if you choose a new lender for refinancing, you might bypass the time requirement.

  • If you have government-insured mortgages like FHA Streamline refinance, you must wait for 210 days, which means seven months from the first mortgage closing date and six months from the due date of your first mortgage payment before refinancing.

  • The FHA cash-out refinance requires only a six-month waiting period.

  • VA streamline refinance requires 210 days from the first mortgage payment date or when the 6th mortgage payment is made, whichever is later.

  • VS cash-out refinance requires a 210-day waiting period. The first mortgage closing date is usually needed.

Is It a Good Idea to Refinance Your Home Multiple Times?

Refinancing multiple times is only good if you fit in the following criteria.

Low-Interest Rates:

If there is a significant drop in interest rates from your original mortgage, it may make sense to refinance. The general guideline notes that there should have been at least a one percent drop in the new interest rate for refinancing your current rate. It is also important to note that your savings depend on your financial situation and closing costs.

Improved Credit Score:

Suppose your credit score has improved since your initial mortgage, and you qualify for a better interest rate; it is good to refinance your home, as a higher credit score can lead you to lower mortgage rates.

Is There a Downside to Refinancing Multiple Times?

Suppose you consider refinancing your home because the interest rate has dropped. In that case, this is not a good decision as multiple refinancing has some downsides.

  1. The Closing Cost Lies on You: With each refinance, you will incur closing costs, which can be significantly high. Considering the cost, on average, refinancing closing costs are around $ 5,000, but they may vary. The cost ranges from 2% to 5% of the loan principle. You will think to reduce the upfront cost, but the refinancing process increases the overall amount owed on your mortgage and its associated interest.

  2. Qualification for Each Refinance: You must qualify for each new refinance if your credit or financial situation has been downgraded since your last application. In that case, it may impact the ability to be eligible for another refinance or secure the best interest rate. If your financial position has changed, it would potentially harm your savings from refinancing.

  3. Pre-Payment Penalties: It is quite an uncommon process, but some loans come with pre-payment penalties. You must pay the fees if you pay off your loan before the term ends. It is necessary to carefully review the terms of your loan to determine if such a penalty exists.

Multiple refinances are possible, but it is also important to calculate the cost and potential odds before considering the one. While credit impact is minimal with spaced-out refinances, the main concern is the cost. Multiple refinances in a short time lead to expenses like closing costs and fees. The key reason to avoid frequent refinancing is the overall expense and the time needed to recoup savings on your mortgage payment.

Examining the Cost of Additional Refinances

Suppose you have a 30-year fixed mortgage for $250,000 with an interest rate of 7.95 percent. Your monthly mortgage payment, excluding insurance and taxes, totals $1,835.

Paying for about 15 years, your balance decreased to $204,329. You decide to refinance your 15-year loan at 6 percent as the interest rate has dropped. This reduces your monthly mortgage payment to $1,703 and increases your interest savings by about $40,049.

With the same, you paid the closing cost for this to refinance to 3 percent of the principal, which is $7,500. However, if you paid 5 percent of the principal, meaning $12,500 instead of 3 percent, you would take four years to recoup the amount, while in the first place, the time was only two years.

After six months, you decide to refinance for a second time. During the period, the balance has dropped to $200,000. You secured a 5.5 percent rate and extended the loan for another 15 years. Your monthly payment dropped to $1,639.

On this refinance, you paid the closing cost of 3 percent, i.e., $6,000. It might take five and a half years to recover the amount. However, paying the 5 percent closing fee of $10,000 would take nine years for you to pay it. 

But if, during the second refinance, you refinance from 6 percent to 5.8 percent, extending it to a 30-year loan to lower your monthly payment at 15 years, you'd have a higher payment, and you'd break even on the closing costs in less than a year. Your new monthly payment would be $1,470. However, keep in mind that you'd end up paying more in total interest, exceeding $160,000 over the life of the loan.

As evident from these examples, it's important to calculate the impact of closing costs, your new interest rate, and your expected duration of homeownership to determine whether refinancing once, twice, or more is financially advantageous.

Does Refinancing Multiple Times Hurt Your Credit?

Refining can temporarily impact your credit score as the process requires credit inquiry, as the lender checks your credit as a part of the application process.

  • When you apply for refinancing your loan, the lender performs a hard credit inquiry; this inquiry affects the FICO credit score.

  • The credit inquiry can impact your credit score for approximately one year, though its impact decreases over time.

  • Multiple credit inquiries in a short time period can have a more significant negative effect on your credit score.

  • Make your payments timely and manage your credit responsibly to recover your credit score.

  • To avoid compounding damage to your credit, wait at least one year before refinancing again.

  • To avoid compounding damage to your credit, wait at least one year before refinancing again.

Bottom Line

Refinancing multiple times is not just a decision but a strategic choice that involves determining the closing cost. It means you incur a slightly higher closing cost each time you refinance. Refinancing multiple times consumes more time and involves paperwork, credit checks, and appraisals. It is also important to consider the savings on your interest rate. It can be a precious financial tool if you carefully assess your finances, compare offers, and determine whether the potential benefits of financing outweigh the associated cost and time investment. 

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21 Nov, 2023

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