How often can you refinance your home?

For most Americans, the reality of homeownership means making payments on their mortgages, homeowners insurance and property taxes just to stay in their homes. Then there’s budgeting for major repairs, home improvements and, in some cases, HOA fees.

All these expenses add up and can put a strain on your budget. Luckily, you can offset some of these costs by refinancing your mortgage to secure a lower mortgage payment.

How many times can you refinance your home?

There’s no legal limit on the number of times you can refinance your home. However, lenders typically require you to have a certain amount of equity in your home to refinance — and this can depend on whether you’re doing a cash-out or rate-and-term refinance. There may also be a waiting (or “seasoning”) period before you can refinance, depending on your loan type and lender.

Additionally, lenders perform a hard inquiry — a formal credit check — every time you apply for a refinance. These hurt your score temporarily, and too many in a short time frame can cause the lender to deny your application.

Beyond that, you also have to factor in closing costs each time you refinance.

How refinancing your home works

Refinancing a mortgage is the process of taking out a new mortgage to pay off (and therefore replace) your current loan.

Broadly speaking, there are two kinds of refinancing loans available:

• Cash-out refinancing loans
• Rate-and-term refinancing loans

There are many other types of refinancing loans, but they generally fall under one of these two umbrellas. Each has its benefits and drawbacks.

Cash-out refinancing

A cash-out refinance lets you tap into some of the equity you have in your home. It involves taking out a new loan that’s larger than your current mortgage. You pay off your existing mortgage with your new loan, then do what you want with the difference.

For instance, if you still owe $100,000 on your home, you might get a $150,000 cash-out refinance to tap some home equity. You pay off your old loan with $100,000 of that refinancing loan, but the extra $50,000 would be yours to pocket as cash.

You can use the cash for whatever you’d like. Common uses include home improvement projects, paying off high-interest debt, and establishing or bolstering an emergency fund.

You won’t have an additional monthly payment because you paid off your old loan, but your new loan payment could be different than you’re used to. You may also get a new loan term or interest rate, so make sure to read all the details carefully before moving forward on a cash-out refinance.

Rate-and-term refinancing

Rate-and-term refinancing allows you to take out a new mortgage of the same balance but with a lower interest rate and a new term.

Getting a rate-and-term refinance can cut your monthly payment and save you money on interest, making your loan more affordable than before.

For instance, you might still owe $100,000 on your current mortgage at 4% interest. If interest rates drop to 3.8%, you could use a rate-and-term refinance to get a new $100,000 loan with the same term length at a lower interest rate, saving you money.

Alternatively, you could refinance to a new loan with a shorter term if you’d like. Your monthly payment might be higher, but you could pay off your mortgage faster.

All that said, rate-and-term refinancing loans don’t let you tap into your equity for cash. You’ll only receive enough funds to pay off your existing loan, but the change in your rate and term might be worth it.

When to refinance

Refinancing makes sense in several situations. It might be right for you if any of the following is true:

You’ve built up equity

Once you build up equity in your home, you can convert that equity into cash by getting a cash-out refinance. You can then use this cash for emergencies, home improvements or other major purchases.

Rates have fallen

When interest rates are low — as in recent years — you can potentially get a new mortgage and lock in a lower rate with a rate-and-term refinance. This could save you on interest and boost cash flows by reducing your monthly payment.

If you want to pay off your mortgage faster, you might be able to get a shorter term length without a much higher monthly payment — assuming you refinance into that shorter loan while rates are low.

You want to ditch private mortgage insurance

Borrowers often have to pay private mortgage insurance (PMI) if they make a down payment of less than 20% when buying their homes. For instance, if you take out a $170,000 loan for a $200,000 home and put $30,000 down, you only have 15% equity in the home, meaning you’ll probably need to pay PMI.

However, imagine your home appreciates to $212,500 before you make any payments — now you have 20% equity in your home. Your $170,000 balance is only 80% of your home’s $212,500 value.

At this point, you might be able to refinance into a new mortgage that doesn’t require PMI, which can save you more on your monthly payment.

Bottom line: Is it a good idea to refinance more than once?

Essentially, if rates have fallen since you got your first mortgage and you want to reduce your mortgage payment and interest, a rate-and-term refinance could help you out — especially if you’ve improved your credit score. However, this won’t work as well if your credit score has dropped or rates are up.

A cash-out refinance can be a great option if your home’s value has appreciated significantly since you bought it and you want to turn some of your hard-earned equity into cash. You just have to be careful not to sign up for a rate or terms you can’t afford.

All things considered, it can be a good idea to refinance multiple times throughout the life of your mortgage if the conditions are right. Make sure to review your credit score, income, expenses, debts and goals each time you plan on refinancing.