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How many times can you refinance a mortgage?

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While there is no limit to the number of times you can refinance your mortgage, there are factors that will determine when it is wise to do so. Let's take a closer look at how you should make the decision to refinance your mortgage and how often you can do it.

Most lenders will not accept a refinance loan application from you if you have refinanced within the last 6 months - this is a major factor in controlling the speed at which you could refinance your home. Also, many loans carry pre-payment penalties (which are fees owed to the lender if you payoff your mortgage before the full term of the loan). If there is a high likelihood that you will ever want to refinance your mortgage you should never take a loan with a prepayment penalty.

Here are some common events that would justify a mortgage refinance:

  • Mortgage refinance rates have dropped significantly
  • You can no longer afford your mortgage payment
  • You have a need for cash and you have equity in your home (i.e., cash out refinance)
  • You want to dramatically alter the terms of your mortgage (for example, moving from a 30 year loan to a 15 year loan)
  • You are going through a divorce or some other situation which dramatically changes your financial landscape

Several years ago when the housing market was booming people were refinancing there homes more frequently than what is generally seen. Mortgage rates were dropping quickly and homeowners were jumping on the opportunity to lower their interest rate and save money. One major drawback to frequent refinancing is the accumulation of fees that can increase your mortgage balance and decrease the amount of equity you have in your home. When you refinance your mortgage there are a number of fees associated with the transaction (title insurance, appraisals, recording fee, document prep fees, prepaid finance charges and the list goes on...). Depending on the size of the loan, the fees can easily be several thousand dollars. Often, some or all of the fees are rolled into the loan amount of your new loan so that you don't have to incur any out of pocket expenses on the transaction. Since your loan balance has just increased you have taken a bite out of the amount of equity you have in your home. Multiple refinances could start to have a serious impact on your equity position. In these days of falling home prices, homeowners need to protect every penny of equity that they have.

If you are considering a mortgage refinance it is imperative that you make your decision based on the whole picture and not just the interest rate and payment that you can get. You need to consider how long you want to stay in your house. If you believe that you will only be in your home for another year or two then the monthly savings you gain from your refinance will have to be very high in order to offset the fees that you will incur on your new loan transaction. You also need to be very careful if you are considering an adjustable rate mortgage (ARM). If you are getting an ARM you need to fully understand when your interest rate will adjust and what index your rate is tied to. NEVER sign mortgage documents if you are even slightly confused by any of the major terms of the loan such as when the rate will adjust and what your rate is based on.

If the current housing crisis has taught us anything it is that it may be wise to pay a bit more to have a mortgage that you understand completely. A 30 year fixed rate mortgage will usually have a slightly higher rate than an adjustable rate mortgage (ARM) but the peace of mind that you can gain from knowing how your mortgage will behave may be worth the extra money.