Homeowners looking to lower their interest rates, save money, or pay off their loans more quickly often choose to refinance their mortgages. But you may be wondering how often you can do a home loan refinance and whether there are disadvantages to refinancing too often. We’ll explain the pros and cons of refinancing so you can decide whether it’s the right option for you.
How Often Can I Refi?
Technically, you can refinance your home loan as many times as you want. However, some lenders may have what’s known as a seasoning period. This is a specific period of time after closing your loan that you must wait before proceeding with a home loan refinance.
The seasoning period varies by lender, but typically, it lasts six months to one year. It may be possible to refinance sooner so reach out to your lender to ask about requirements.
What Are the Pros and Cons of Refinancing?
If you’re thinking about doing a home loan refinance, you should weigh the pros and cons first. Let’s start with the positives.
Pros of Refinancing
If you’re able to secure a lower interest rate, refinancing your home loan could help you save money over the life of your loan. You may also want to think about doing a home loan refinance to extend your loan term if you want to lower your monthly mortgage payment.
If you need the extra cushion in your monthly budget, refinancing for a longer loan term can give you some extra breathing room. Just keep in mind that you’ll wind up spending more money on interest over the life of the loan since you’re extending the amount of time you have to pay the loan back.
Refinance calculators are an excellent tool for comparing the terms of your existing mortgage with the terms of a new loan. To get started, simply select whether you want to do a home loan refinance to lower your monthly mortgage payment or reduce your interest rate.
Say, for instance, you want to lower your interest rate to save more money over the life of your loan. Start by inputting your current loan amount, loan term, interest rate, and loan origination date. Let’s say you financed $300,000 for your home purchase in 2020 at an interest rate of 7 percent on a 30-year term. Your current monthly mortgage payment is around $2,000.
Since then, you’ve worked hard to improve your credit, and you’ve found a lender offering you a refinance rate of 6.25 percent. You’re not planning to do a cash-out refi so you only want to pay off the existing loan balance, but you do plan on spending about $6,000 in closing costs. You also want to keep the same 30-year loan term.
You’ll plug in the new interest rate and closing costs in the box labeled “new mortgage details” and voila! With your new interest rate, you can see that you’ll reduce your monthly mortgage payment by $188, and you’ll save nearly $6,000 in interest in the first 5 years of the new loan. Your break-even point is around the three-year mark (more on that in just a bit). That sounds like a pretty good deal, right?
Cons of Refinancing
There are certainly advantages to refinancing. But before doing so, you should ensure that proceeding with one is in your best financial interest.
For instance, if you’re planning to sell your home in a couple of years, it may not make much sense for you to do a refinance right now. In fact, since there’s a good chance you won’t be in the house long enough to see a return on your investment, you could potentially wind up losing money by doing a refinance.
In that case, it may be beneficial to explore other options. Let’s say, for example, you’re looking to do a cash-out refinance to pay for a down payment on a new home. Before proceeding with a home loan refinance, meet with your lender to see whether a bridge loan might work better.
A home equity line of credit is another option if you’re looking to access some extra cash. Be sure to explore all available options with your lender to determine which one would work best for you.
Is Refinancing Worth the Cost?
To figure out whether refinancing is worth the cost, consider your personal situation, compare lenders, and crunch the numbers. Start by asking yourself a few basic questions. Are you likely to relocate in the coming years, or are you planning to stay put for the foreseeable future? How long after the refinance will you be able to recoup the cost of the loan? This is known as the refinance break-even point.
The break-even point is the point in time when you’ve saved enough money in interest to earn back the money you spent on the refinance. You can refer back to the refinance calculator to determine your break-even point in order to have a better sense of whether refinancing is a good idea.
You should be certain that you will hold on to your home until you reach at least the break-even point. You should also keep in mind that the break-even point will vary depending on each lender’s closing costs and the interest rate you’re offered. So it’s important to shop around and compare what each lender is able to offer.
If you’re based in Washington State and you’re interested in doing a home loan refinance, schedule a time to visit with a Home Loan Guide at Solarity Credit Union. They offer competitive interest rates, a fast application process, and a convenient, online closing that can be done from the comfort of your own home.
When you’re ready to make your next smart financial move, a Solarity home loan expert can assist you every step of the way. Get on the path to an empowered financial future.