Mortgage churning involves repeated refinancing of a borrower's mortgage within a short period, often resulting in additional costs and limited financial benefit for the homeowner.
A homeowner refinances their 30-year mortgage after two years to a lower rate. They incur closing costs and fees. Within another year, they're encouraged to refinance again. While each refinancing may lower the rate, the process involves fees and can extend the loan's term, leading to higher overall costs.
Refinancing must offer a net tangible benefit, like reduced interest rates or lower monthly payments. This requirement ensures that refinancing serves the homeowner's financial interests.
When refinancing, particularly within three years of the original loan or previous refinance, lenders must demonstrate that the new loan offers a significant net tangible benefit to the borrower. This rule helps protect borrowers from refinancing that does not provide a substantial financial advantage or might lead to higher overall costs.
Homeowners should ideally wait at least 12-18 months between refinances. This interval allows for the realization of benefits from the previous refinance and prevents the accumulation of fees and costs associated with frequent refinancing.
Knowledge of mortgage churning risks and refinancing requirements, including the three-year rule for net tangible benefit, is crucial. This understanding aids homeowners in making informed refinancing decisions and avoiding financial traps.