How many times can I refinance a mortgage?

You can technically refinance a mortgage as many times as you want, but there are practical considerations to keep in mind since you'll typically incur closing costs—which can add up—each time you do so.

How much does it cost to refinance a home?

Refinancing costs vary but usually range between 2% and 5% of the loan amount you’re mortgaging. Note lenders provide a loan estimate early on in the process and a closing disclosure prior to closing, reflecting the final numbers.

Mortgage refinance vs home equity loan: Which is better?

Deciding between a mortgage refinance and home equity loan largely depends on your financial goals and situation. While refinancing can lower your payments, closing costs are sometimes high—and you might pay more interest over the life of the loan. While a home equity loan provides you with a lump-sum payment and lower closing costs than a refinance, you risk foreclosure if you can't make the payments.

Is mortgage interest tax-deductible when refinancing?

Yes, mortgage interest is indeed tax-deductible on up to $750,000 of eligible mortgage debt—or up to $375,000 if married but filing separately—from your federal taxable income. For mortgages obtained between October 13, 1987 and December 16, 2017, you can deduct the interest paid on up to $1 million of eligible mortgage debt (or up to $500,000 if married but filing separately). To qualify, the mortgage interest must be on your primary home, a second home (with specific rules if you rent it out), a house under construction, or a home that’s been sold. Considerations regarding penalties and fees exist as well.

How and When to Refinance a Mortgage Loan

Refinancing is the process of paying off an existing mortgage loan with a new one. If this can save you money and help you build equity while paying off your mortgage more quickly, it’s generally considered an intelligent decision. That said, other scenarios also provide homeowners with a distinct opportunity to refinance with the most common outlined in this article.

What you need to know before refinancing

Start by digging up your current interest rate and the remaining balance on your mortgage, providing your financial foundation for refinancing. Also take a moment to ponder how long you intend to keep calling your house home, significantly impacting your decision and helping to determine your break-even point (which we’ll discuss shortly).

Reasons you may consider refinancing your mortgage

To lower your interest rate

Depending on who you talk to, you’ll likely get varying answers regarding the ideal time to refinance. That said, one rule of thumb is to consider doing so when current interest rates are at least a percentage point lower than your existing rate. Broad generalizations often don't work, however, since (depending on the math) even a half-point interest rate improvement can make refinancing worthwhile.

Let’s assume you currently have a $400,000 30-year fixed rate mortgage with an interest rate of 5% and your monthly payment is $2,147. With 30-year rates at 4%, you want to evaluate whether refinancing makes sense so you decide to calculate your break-even point: simply dividing your total closing costs by your monthly savings to do so. A new mortgage at 4% would reduce your monthly payment to $1,910 for monthly savings of $237. Now assume this new loan comes with approximately $9,000 in closing costs. In this case, your break-even point would be 37.97 ($9,000/$237), meaning refinancing is perhaps only worthwhile if you plan on staying in your home longer than 38 months.

Use the same math if your credit score has improved (ideally 20 to 40 points since obtaining your last mortgage) and you want to learn if you qualify for a lower rate. The same applies if you’re converting to—or, more commonly, from—an adjustable-rate mortgage (ARM).

To cash out (tap into your equity)

A cash-out refinance takes your existing mortgage balance and converts a portion of your current equity into cash (a loan), combining both into one new larger mortgage. Homeowners often utilize this strategy when they need a lump sum of money to pay for home improvements or college, consolidate high-interest debt, or buy a second home.

There’s a limit on how much you can cash out with a mortgage refinance, however, since you're typically required to maintain at least 20% equity in your home (this threshold varying by property type and lender). If your home is currently worth $500,000 and you still owe $200,000, for example, you have $300,000 (or 60%) in equity and can cash out up to $200,000: your new mortgage for $400,000 if you withdrew the full amount available to you.

If interest rates have declined or your credit score has improved, meanwhile, you might benefit from a cash-out refinance allowing you to secure a lower interest rate to make it that much more appealing. Consider this only if you’re a financially disciplined homeowner, however, as your new mortgage may both extend how long you’re in debt and increase the interest you’ll pay over the life of the loan. There's also the risk of owing more than your home is worth if home values drop, putting some one step closer to a never-ending debt cycle.

Depending on your own unique needs, consider alternatives such as a home equity loan, line of credit, or personal loan—zero or few closing costs accompanying each.

To reduce your term

While reducing your mortgage term can help you save on interest and pay off your home more quickly, it can mean substantially higher payments. You’ll therefore need to ensure these fit into your existing budget. A $500,000 30-year mortgage with a rate of 6%, for example, comes with a monthly payment of $2,998 whereas this climbs to $4,219 for a 15-year mortgage.

Keep in mind alternatives designed to pay off your mortgage more quickly in the absence of refinancing costs do exist, including allocating more toward the principal each month or relying on a biweekly (instead of monthly) mortgage payment schedule. Making biweekly payments on a $400,000 30-year fixed-rate mortgage at 6%, for example, would result in approximately $102,567 in interest savings over the life of your loan and help you pay off your mortgage about 5 years faster. Even better? Paying an extra $500 extra a month towards your principal would save you over $182,000 and help you pay off your mortgage 10 years and 5 months sooner!

Mortgage refinancing requirements

Your lender will have similar qualifying criteria as if you were applying for any mortgage. Consider the following requirements before applying:

Debt-to-income (DTI) ratio

Your debt-to-income ratio (DTI) is the percentage of your income going toward debt payments. The lower it is, the better your chances of approval. A “good” DTI likely falls under 35%, with lenders even more likely to lend to you if you can push it even lower (though thresholds vary by lender). More granularly, a DTI works like this: Let’s say you make $10,000 per month but your total monthly debt payments amount to $5,000 per month. Your DTI would be calculated at 50% ((5,000/10,000) x 100 = 50%), which is far too high for most mortgage types (most lenders cap top thresholds at 41–43%).

Credit score

While 620 is often the minimum score needed for an approval, a higher credit score can unlock better interest rates: translating to lower monthly payments and more home for your money.

Refinance seasoning

You generally need to wait a minimum of six months after your original loan closes to qualify for a mortgage refinance.

Equity

Most lenders want you to have at least 20% equity before they’ll consider refinancing a mortgage.

Mortgage refinancing concepts to know

Amortization

Amortization is the period in which debt is reduced or paid off, refinancing restarting this. A rate and term refinance, for example, can reset your amortization period while giving you the option to change your loan term and potentially lower your monthly payments. Let’s say you’re 3 years into a 20-year loan, and your new loan is also for 20 years; you’ll make payments over a 23-year period in this case, and it might make sense to refinance to a shorter term or preserve the same term and prepay the mortgage with savings to repay more quickly (at least until you “catch up”). You can enlist the help of an amortization schedule calculator to determine which option makes the most sense for you.

Loan-to-value ratio (LTV)

Expressed as a percentage, your loan-to-value ratio (LTV) is the size of your loan compared to the value of the asset you’re borrowing against (your home, in this case). Lenders use this ratio to determine loan risk; the higher the LTV, the more risk a lender assumes (which often means higher costs for you, the borrower, assuming you qualify).

To calculate LTV, divide your mortgage balance by your home’s appraised value. If your home appraised for $400,000 and your mortgage balance is $200,000, for example, your LTV is 50%. If your lender only allows up to an 80% LTV (anything over this often requiring the borrower to pay for private mortgage insurance), you can cash out an additional $120,000. LTV requirements can differ between loan types; a conventional loan, for example, typically requires a lower LTV to avoid PMI while an FHA loan may allow higher LTVs with more lenient credit score requirements.

Private mortgage insurance (PMI)

When you refinance, you should know how much equity you have in your home—the difference between its market value and what you owe—since lenders typically require private mortgage insurance (PMI) for anything less than 20%. PMI (which gives the lender extra protection should you default) isn’t cheap, costing between .5% to 1% of your loan amount. Switching from adjustable-rate mortgages to fixed-rate loans or mortgages can impact PMI requirements, as different loan types have varying thresholds in this respect. To gain an idea of market value, you can check your area’s property values and/or consult with a local real estate agent.

The bottom line: refinancing your mortgage

While it isn’t easy to make a broad case for mortgage refinancing since it all depends on your own unique situation, doing so is generally a smart decision if it can help you save you money, build equity, and/or pay off your mortgage more quickly. When used carefully, refinancing is also a valuable tool for consolidating debt or purchasing a second home. Hopefully you feel more prepared to consider such a move than you did previously after reading this post.

Have questions about when to refinance your home loan? Schedule a free consultation with one of our CFP® professionals to get them answered.

FAQs

You can technically refinance a mortgage as many times as you want, but there are practical considerations to keep in mind since you'll typically incur closing costs—which can add up—each time you do so.
Refinancing costs vary but usually range between 2% and 5% of the loan amount you’re mortgaging. Note lenders provide a loan estimate early on in the process and a closing disclosure prior to closing, reflecting the final numbers.
Deciding between a mortgage refinance and home equity loan largely depends on your financial goals and situation. While refinancing can lower your payments, closing costs are sometimes high—and you might pay more interest over the life of the loan. While a home equity loan provides you with a lump-sum payment and lower closing costs than a refinance, you risk foreclosure if you can't make the payments.
Yes, mortgage interest is indeed tax-deductible on up to $750,000 of eligible mortgage debt—or up to $375,000 if married but filing separately—from your federal taxable income. For mortgages obtained between October 13, 1987 and December 16, 2017, you can deduct the interest paid on up to $1 million of eligible mortgage debt (or up to $500,000 if married but filing separately). To qualify, the mortgage interest must be on your primary home, a second home (with specific rules if you rent it out), a house under construction, or a home that’s been sold. Considerations regarding penalties and fees exist as well.

About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.

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