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How often can you refinance your home? Rules for standard and cash-out refinances

Larry Phillips
The Mortgage Reports contributor

You can refinance even if your current loan is still fresh

With today’s low mortgage rates, you might be thinking it’s time to refinance. Locking in a lower rate can mean huge savings over the life of your loan.

But what if you just recently bought the home, or already refinanced once? Is it too soon to refinance? Can you do it again?

Fortunately, you can refinance your mortgage as many times as you want. In most cases, there are no rules or regulations that prevent you from refinancing into a loan with a lower rate or term — as long as it makes financial sense. 

Check current rates to see how much you could save by refinancing.

Find and lock a low-interest refinance rate (Nov 22nd, 2019)

When can I refinance my home?

Rules about when you can refinance your home vary depending on the kind of loan you have. They also differ for rate-and-term refinances, which we’ll go over here, and cash-out refinances (see below).

  • Conventional loan: No waiting period to refinance
  • Government-backed loan: Six-month waiting period to refinance
  • Some lenders enforce a six-month waiting period regardless of loan type

For a rate-and-term refinance — meaning the goal of the refi is to get a lower rate or shorten the loan term — you might be eligible to refinance immediately after closing on the loan. Many conventional mortgages do not require a waiting period to refinance.

Related: How long does it take to refinance a house?

If your mortgage is government-backed, you may have to hold off a bit. For example, FHA streamline and VA streamline refinance programs require you to wait at least six months after your existing mortgage closed before you can refinance. 

Many lenders also have “seasoning” requirements. Oftentimes you’ll have to wait at least six months before refinancing with the same lender.

However, a seasoning requirement doesn’t stop you from getting a better deal with a different lender.

Feel free to shop around for a better rate and switch lenders if you can save.

Compare refi rates from major lenders. Start here (Nov 22nd, 2019)

Rules for cash-out refinances

Cash-out refinance rules are a little different than rate-and-term refinances. Most lenders make you wait a minimum of six months after the closing date before you can take cash out on a conventional mortgage

If you have a VA-backed mortgage, you must have made a minimum of six consecutive payments before you can apply for a cash-out refinance. The refinance must also provide you with a net tangible benefit. 

Cash-out refinances require a six-month waiting period. You also have to build up enough equity in the home to qualify for a cash-out loan, which takes time.

Many homeowners use cash-out home loans as a way to get the capital they need to renovate or improve their houses using a new, low-interest mortgage.

Some homeowners use the money to consolidate debt, while others might use the loan proceeds to strengthen their investment portfolios or help pay for a child’s education.  

Whatever plans you have for the money, you have to figure out how the new loan will affect you financially. You’ll also need enough equity in your home to qualify for a cash-out refinance. 

On most conventional mortgages, your new cash-out refinance loan amount can’t exceed 80 percent of your home’s value. On September 1, 2019, the FHA capped its cash-out loan amounts at 80 percent of your home’s value.

Lenders set these limits to ensure you have some equity left in your home after you refinance.

However, the 80 percent rule isn’t set in stone on conventional loans. Texas is one exception, where there are different cash-out refinance rules.

Many lenders are also willing to let you borrow more than 80 percent of your home’s value if you pay private mortgage insurance (PMI) or pay a slightly higher interest rate. 

VA-backed mortgages are another exception to the rule. They allow cash-out loans up to 100% of the home’s value, although many lenders cap loan-to-value at 90%.

Why you should consider refinancing (even if you already have)

Interest rates are around their lowest levels in nearly three years.

As a result, recent data from analytics firm Black Knight showed more than 11 million homeowners could cut their interest rates by nearly a full percentage point by refinancing (0.75% on average, according to the data). 

By lowering your interest rate by 1.0%, you could shave almost 10 percent off your mortgage payment each month.  

Dropping your mortgage rate by just 1% could save you more than $100 per month.

For example, imagine you locked in a rate of 4.8% around this time last year. You could reduce your rate one percent by locking in today’s rate of close to 3.8%.

So, If your loan payment is currently $1,700, you could knock $170 off that payment each month just by refinancing. And it doesn’t matter whether you recently refinanced or closed on your loan. 

Verify your new rate. Start here (Nov 22nd, 2019)

No such thing as refinancing “too early”

You can’t refinance your mortgage too early — or too often — if you’re saving money.

In fact, it’s often better to refinance earlier in your loan term rather than later.

That’s because a refinance starts your 30-year loan period over at year one. In many cases, the longer you wait to refinance, the longer you’ll end up paying interest — and the more you’ll ultimately pay over the life of the loan.

Take a look at one example:

  Original loan Refinance after 1 yr Refinance after 3 yrs
Balance $200,000 $196,886 $190,203
Interest rate 4.7% 3.7% 3.7%
Interest savings over 30 years $32,200 $18,371

Let’s assume your original loan amount is $200,000 with a 4.7% interest rate. Your monthly principal and interest payments would be $1,037. After one year, the remaining balance on your loan would equal $196,886. 

If you refinance after year one into a 3.7% rate — which is about where rates are today — you’ll save $32,200 in interest over the remaining 30 years of your loan. 

If you choose to refinance after three years, your loan amount would equal $190,203. Refinancing into a 3.7% rate at this time would only save you $18,371 in interest payments over the remaining 30 years of your loan. 

So, why are you saving more when the loan amount after three years is almost $7,000 lower? Every time you refinance, you reset your loan for another 30 years.

The longer you wait to refinance, the more time it takes to pay off your mortgage, which means the less you save in interest payments. 

When refinancing is the right choice

If you can significantly lower your monthly payment or pay off your loan faster, refinancing is probably a good idea. 

However, everyone’s finances are different. A general rule of thumb is to calculate how long it takes to break even on your closing costs and start seeing real savings.

You’ll pay around 2-5 percent on average of your loan amount in closing costs. You can use these costs along with what you’re saving in payments to calculate how many months it will take to recoup the money and break even. 

Let’s say you pay $5,000 (2 percent) in closing costs on a $350,000 refinance, and you lower your mortgage payment by $225. To find your break-even point, you divide your total closing costs ($5,000) by how much you reduced your monthly payment ($225). 

Here’s the calculation: $5,000 / $225 = 22.2. It will take you approximately 22 months to recoup your closing costs and start saving money. 

If you don’t plan on moving during those 22 months, it’s probably the right choice to refinance. Any break-even below 24 months is generally considered a good benchmark. 

The bottom line is you can refinance as often as you like — as long as you’re meeting your personal financial goals. In the mortgage industry, there’s no rule that says you’re only allowed to refinance once.  

Refinance even if you closed recently

If rates are significantly lower than when you closed your home loan, consider a refinance. Even if you just closed or refinanced once, you’re allowed to act on a lower rate.

Start by checking personalized refinance rates today to see how much you could save.

Find and lock a low refinance rate. Start here (Nov 22nd, 2019)