The benefits of refinancing a home mortgage are immediate and long lasting, which leads some homeowners to wonder how frequently they should refinance their home or at least explore their current options with home refinancing.Get a Home Loan Quote
When would be too soon to consider refinancing your home again?
After as little as four years, some factors reemerge that could make refinancing your home again a smart move. While there is technically no limit to how often you can refinance your home, each refinance comes with a price tag, and you are considering this to save money, right? Homeowners typically don't refi every year.
When would be the right time to refinance your home again?
Four years is the earliest sweet spot for refinancing your home, for reasons we will cover.
1. You Can Leverage Your Increased Home Equity
Home values surged over the past few years, so now you have more home equity than you otherwise would after a four-year period. This should make you more attractive to home lenders when you refinance your home and will improve your chances of securing a lower rate than you otherwise could.
Your increased home equity also might mean that this time around, you can drop private mortgage insurance (if it hasn't been dropped already). Sometimes called lender's insurance, PMI is usually required when you make a down payment less than 20%. It is insurance you pay to cover the lender, not yourself. In the event that you default on your house mortgage, the lender can collect insurance to cover some or all of its loss.
How often can I refinance my home?
There's no limit.
Many homebuyers can't swing a down payment as large as 20%. They will only reach that share of home equity with time. But thanks to rapidly increasing home values, in just a few years you might have sprinted across the key 20% line.
2. Your Previous Closing Costs Are Probably Paid For
Closing costs are typically 2%-5% of the financed amount, and it takes a while to recoup that money. You get back a little every month that you make a lower payment thanks to your refi. One month, it happens: You break even. The cost of the refi has been offset by months of making a lower payment. From now on, you enjoy pure savings.
Every home loan that has costs of its own (origination fee, closing costs, discount points) will have its own breakeven point, because it depends on how much money the loan saved you. The formula is basic:
Loan Costs ÷ Monthly Savings = Breakeven Point
Example: All the costs associated with the home refinance are $7,000 and your new lower payment saves you $215 every month. Divide the costs by the savings, and you find that it will take about 32 months to break even.
$7,000 ÷ $215 = 32.5
What's a good breakeven point for a mortgage refinance? Experts say 30 months, or 2½ years. Some people will break even sooner, others later.
Calculate your breakeven point when considering any home refinance, because not breaking even by 30-35 months or so (under three years) probably means the closing costs are too high and the savings too little. In that case, you should keep looking for better mortgage refinance options.
3. Rates Then Might Have Been Higher Than Rates Now
Four years may not sound like much time. A four-year-old shirt is still a new shirt in our book. But it's enough time for mortgage interest rates to swing widely.
Sure, we've moved through a period of historically low rates to find ourselves somewhere else, but low is relative. It doesn't matter how low today's rates are. What matters is: Are they lower than the rate on your current home mortgage?
A difference of only 1% can be sufficient to make refinancing your home worthwhile.
Try not to add years
If you have 21 years left on your home mortgage, refinance for 21 years to match. Ask the home lender to adjust your term. Adding years would be going backward.
Four years is too long to postpone getting a suspicious mole examined but just right for exploring another mortgage refinance.
4. Your ARM Is Probably Scheduled to Adjust Next Year
Refinancing your home again could be a financially sound way to dodge the impending rate adjustment of an adjustable-rate mortgage.
The most common adjustable-rate mortgage is a 5/1 ARM. This means you will have an initial period of five years (the “5”) when the interest rate is fixed. After five years, you can expect the ARM to adjust once a year (the “1”).
With an ARM, it's unnerving to know that your monthly payments could go up. Life is unpredictable enough without having a question mark looming over your mortgage payments because of the unpredictable nature of an ARM.
You wouldn't mind an automatic adjustment to prevailing market levels if the percentages were dropping, as they were before and during the pandemic. But forecasters today see only higher numbers on the horizon compared to four or five years ago.
Stop paying for mortgage insurance.
It comes down to owing versus owning.
When you took out the first mortgage, let's say your home was priced at $325,000 and you owed 88% on it because you'd put down 12%. A down payment represents how much of the home you own on day one. After four years you still owe around $265,000 but the home is reappraised at $370,000. Suddenly (if four years can be called sudden), the share you owe the bank has fallen to 72% and you own 28%.
Read the proven ways you can speed up your refi.
As soon as you attain 20% equity in your home, you can ask a lender to cancel your PMI, although you will have to pay for the reappraisal. Once you attain 22% equity in your home, by law the lender must cancel your PMI.
Consider the cash-out refinance option.
Another tremendous bonus of rapidly growing home equity is that it opens the door for you to convert some of your equity to cold hard cash. Here at Rate Simple, we'd love to help you explore your best cash-out refinance options today.
In a Nutshell
Mainly because you want to cover the previous loan's closing costs before refinancing again, four years is the earliest sweet spot. Your savings from the last refi has covered the cost of getting that loan off the ground, and now you can consider another refi to take advantage of your increased equity and a beneficial change in interest rates compared to when you took out the last loan. Furthermore, if you are currently in an adjustable-rate mortgage, refinancing at the four-year mark is a chance to dodge the looming rate increase.Get a Home Loan Quote