How soon can you refinance your mortgage again if you've already
done it recently? With interest rates in a free-fall and setting
new records, it's a highly relevant question.
The answer is, there's really no limit, at least under the law.
The more relevant question is, how long *should* you wait before
refinancing again? And how soon will your lender allow you to get
out of your current mortgage?
In fact, the homeowners who are in the best position to
refinance right now may be the ones who already refinanced in the
last year or so. Virtually everyone wanted to take advantage of
what were then historically low rates in the spring of 2009 and
fall of 2010, so just about the only ones who didn't refinance are
the ones who couldn't because they were underwater on their current
mortgage - and probably still are.
Look out for prepayment penalties
There are a few things to beware of when refinancing quickly
after taking out a previous mortgage. The first is that your
existing mortgage may have a prepayment penalty, particularly if
you took it out less than one year ago. If your current mortgage
was a "no cost" mortgage or refinance, you'll probably have a
prepayment penalty if you refinance within less than three to five
Prepayment penalties can be steep - often equal to six month's
interest charges on your current mortgage. That can make
refinancing a whole lot less attractive, so you want to be sure to
take it into account when figuring potential savings from a
Also, some banks may be reluctant to refinance a mortgage that's
less than a year old, particularly if you're refinancing through
the same bank.
3 major concerns - interest, costs and time
Aside from that, the only real limit on how soon you can
refinance is whether you can save money by doing so. That's mainly
a function of three things: 1) your interest rate, 2) closing costs
and 3) how long you expect to live in the home.
The general rule of thumb is that you don't refinance unless you
can save at least a full percentage point off your current interest
rate. In reality, however, the key question is whether you can
reduce your interest rate enough to offset your closing costs - and
that depends on how long you plan to stay in the home.
Here's how it works: Suppose you've got a $250,000 30-year
mortgage at 4.5 percent. Refinancing at 4.0 percent, with $5,000 in
closing costs (assuming you're keeping the same payoff date and
rolling the closing costs into the loan balance) will save you
about $50 a month. So it will take you 100 months, or over eight
years, to recoup your closing costs (the break-even date). That's
not a good deal unless you're planning to stay in the home a long
The above example also helps show the importance of controlling
your closing costs. If you can negotiate your closing costs down to
$3,750 (1.5 percent of the loan balance, instead of 2.0 percent),
you'll recoup your costs in a little over six years, making the
deal much more attractive. Similarly, if your closing costs are
$7,500 (3.0 percent of the loan), it's going to take you almost 13
years break even, unless you get a much bigger reduction in your
What about "zero-cost" refinances?
Many people are attracted to so-called "no-cost" or "zero-cost"
refinances, where there is supposedly no charge to refinance. In
reality, the closing costs are simply rolled into the new loan in
the form of a higher interest rate. These aren't a bad deal if
you're only planning to own the home for a short time, but if
you're planning to remain there longer than 5-8 years, you're
usually better off rolling the fees into your loan balance and
taking a lower interest rate. In addition, no-cost mortgages almost
always include prepayment penalties to ensure that you keep the
mortgage long enough for the lender to recoup the closing
If you're looking to shorten your mortgage term - for example,
going from a 30-year mortgage to a 15- or 20-year one (which offer
much lower rates right now), you want to look at whether you can
comfortably afford the accelerated payments and what your interest
savings would be over the life of the loan or the period you expect
to own the property, whichever is shorter.
Can you refinance too often?
Some people are concerned that if they refinance too often, they
may keep racking up closing costs that increase their mortgage
balance faster than they can reduce it over time. Often, they also
end up re-extending their mortgage term, which cuts into any
savings in interest they realize.
There's no easy way to determine this, but generally you want to
make sure you're coming out ahead of where you'd be if you stayed
with your any previous mortgages. If, after accounting for costs,
interest savings and extended amortization from all subsequent
refinances, you find that you'd just be digging yourself deeper
into a hole, you probably shouldn't refinance.