Choosing between a cash-out and a rate-and-term refinance depends on whether you're seeking immediate cash or long-term savings through lower interest rates or a shorter loan term.
Jump to insightMany refinance options require you to wait at least six months to a year after your last mortgage or refinance, depending on the loan type and purpose.
Jump to insightRefinancing more than once can lead to significant savings or equity access, but repeated refinancing may chip away at your credit score and increase long-term costs due to recurring fees.
Jump to insightWhat is refinancing and how does it work?
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 can use the cash for whatever you’d like.”
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.
How soon can you refinance?
The amount of time you must wait before refinancing varies depending on your loan type and whether you’re seeking a rate-and-term or cash-out refinance.
- Conventional loans: For a rate-and-term refinance, many lenders have no official waiting period, but you may need to wait six months after your previous refinance. For a cash-out refinance, most lenders require you to wait at least six months from the date of your original mortgage closing.
- FHA loans: You generally need to wait 210 days or have made six monthly payments (whichever is longer) before refinancing with an FHA Streamline Refinance. For cash-out refinancing, the FHA requires you to have owned and lived in the home for at least 12 months.
- VA loans: With a VA Interest Rate Reduction Refinance Loan (IRRRL), you must wait at least 210 days or have made six consecutive payments. Cash-out refinances backed by the VA also require that you meet certain occupancy and timing guidelines.
- USDA loans: USDA Streamline Refinances require a 12-month seasoning period with an on-time payment history before applying. For other refinance options, requirements vary by lender.
Understanding these minimum timeframes is essential to planning your refinance strategy and avoiding unnecessary credit checks or application denials.
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.
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.
Pros and cons of refinancing your mortgage multiple times
Refinancing more than once can offer ongoing financial benefits, but it also comes with some risks. Here’s a breakdown of the potential pros and cons:
Pros
- Lower monthly payments
- Improved loan terms
- Access to equity
- PMI elimination
Cons
- Closing costs add up
- Credit score impact from multiple lenders doing a hard credit check
- Reset loan term
- Possible higher rates if market rates rise
FAQ
What are today’s mortgage refinance rates?
Mortgage refinancing rates have been at historic lows because the Federal Reserve lowered interest rates to nearly 0% during the pandemic. However, refinancing rates are creeping up as the economy recovers.
How much does it cost to refinance?
Starting the refinancing process itself costs nothing. However, you will have to pay closing costs. As of publishing, average closing costs for refinancing loans sit around $5,000, according to Freddie Mac.
Closing costs are determined in large part by your state, county, loan type and home value, but these costs are often what you saw when you closed on your original mortgage. They can include (but are not limited to) origination fees, credit report fees, attorney fees, title services and underwriting fees.
Can I refinance my mortgage with no closing costs?
Yes, technically, you can refinance with no closing costs.
However, you’ll end up paying for them in some form. In most cases, the lender will add your closing costs to the mortgage balance, meaning you’ll have a larger loan to pay off over time.
Some lenders may also let you take a higher interest rate to waive your closing costs. Your principal balance won’t change, but, again, this will raise your monthly payment amount.
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.
Sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Freddie Mac, “Understanding the costs of refinancing.” Accessed January 19, 2022.
