How Often Do People Refinance Their Homes?
Refinancing your mortgage loan can be an effective way to shave $100 or more off your payment every month. But it rarely makes financial sense to refinance your home loan too often. Refinances aren't free, and you'll need to reduce your interest rate enough to cover the lender's closing costs quickly.
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Refinance Costs
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People don't refinance their homes every month or every year because refinances aren't inexpensive. They only make financial sense if you can lower your monthly loan payment by enough to allow you to quickly recoup the closing costs you pay to refinance. This can only happen if interest rates fall by a significant amount. Rates don't change enough on a month-to-month basis to make frequent refinances worthwhile. You can expect to pay anywhere from 2 percent to 5 percent of your loan's value when you refinance.
Time Factor
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Refinancing takes a significant amount of time. When you apply for a refinance, you'll have to provide a series of documents to verify your gross monthly income and monthly debt obligations. This requires you to make copies of paperwork such as your last two federal income tax returns, two most recent paycheck stubs, current bank savings, checking account statements, and most recent credit card bills. You might also have to submit copies of your current auto loan statement and your most recent retirement account statements. Gathering this paperwork and copying it takes time. If the refinance will not give you significant financial savings, it might not be worth the energy it takes to complete it.
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Prepayment Penalties
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Prepayment penalties can also limit the number of times you should refinance your home loan. These penalties -- usually about 2 percent to 4 percent of your home loan's value -- result if you pay off your loan too early, often within two to five years. Refinancing your existing loan and turning it into a new one, counts as paying off your mortgage. The prepayment penalty might cut into the savings of your refinance enough to make the move fiscally unsound.
Falling Home Values
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You might not be able to refinance as often as you would like if your home loses value. Most lenders require that you have at least 20 percent equity in your residence before refinancing. If your home has fallen in value since you bought it, you might not have this amount of equity. You might even owe more on your mortgage than what your residence is worth. This can effectively limit the number of times that you refinance.
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