How many times can you refinance?

RefinancingRefinancing can be a great way to lower your payments or to free up some cash for renovations. It’s a useful tool that many homeowners will take advantage of at one point or another. However, is there such a thing as too many refinances?

Legally speaking, no. There are no specific regulations that say how many times you can refinance, but there can be too much of a good thing. Here are some things to consider when weighing the pros and cons of your next refinance.

What are the closing costs? There’s a lot of paperwork and number crunching involved in a refinance. It takes time and resources from the mortgage company, appraisers, title company, etc. Just like with a traditional mortgage, that means closing costs for you. Do the math to make sure any potential savings will offset the closing costs. For example, if a refinance will lower your payments by $100/month but your closing costs will be $4,000, you won’t start saving any money for over 3 years (40 months = $4000/$100). If you are thinking about moving in 3 years, you might want to skip this refinance.

Are zero closing cost loans real? Some lenders will advertise zero closing cost loans. If this sounds too good to be true, it’s because it probably is. These loans usually compensate for the low upfront costs by raising their interest rates or increasing your principal balance. Instead of a bulky upfront payment you spread the mortgage costs throughout the loan term. You can certainly use this to your advantage if you are careful. Just make sure you go in with your eyes open.

Are there prepayment penalties? If you pay off your loan early, the mortgage companies won’t make as much money. The longer your loan term, the more interest they collect. Some loans are structured with prepayment penalties that will charge extra if you try to pay off the loan too quickly. Since a refinance essentially pays off an existing loan, you may be subject to prepayment penalties. Check the terms of your current loan to see if any of these fees have been incorporated. Thankfully there aren’t as many of these as there used to be, but make sure to do your homework.

What is the effect on your credit score? When you shop for a refinance, expect to undergo a credit check. These hard credit inquiries can influence your credit score. It’s not a big problem if you have a few checks here and there, but if you are continually applying for refinancing, it can add up. Each one may decrease your score by an estimated 5-10 points.

When should you refinance? Any time is a good time to finance, but make sure you check out the details. Have you reviewed the closing costs and current loan terms? Are you sure you have outline your goals for refinancing? If the numbers and goals align, then it is time to take action.
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