How soon after purchasing my home can I refinance?
With historically low interest rates, you're probably seeing a fair share of news items declaring what a great time it is to refinance your home. After all, refinancing can be a smart financial move if it results in lowering monthly payments, reducing loan duration, or building home equity more quickly. But the bigger question lingers: How soon can you (or should you) refinance after buying a house or condo?
Before contacting a loan officer or mortgage servicer about refinancing, take a read through the next few sections of this post to see if refinancing is right for you.
What does it mean to refinance?
Simply put, refinancing is replacing your current home loan with a brand new one. Here's why that might be an option, even if you have a decent rate already:
- You want to reduce monthly payments with a lower interest rate or a longer-term (or both)
- You'd like to pay off your mortgage faster by shortening the terms
- You've re-evaluated having an adjustable-rate mortgage (ARM) and want to convert it to a fixed-rate mortgage
- You've got financial hardships, home improvements, or a major purchase on the horizon and you want to tap into your home equity
- Your credit rating has improved making you eligible for a better rate
- You want to get rid of PMI (Private mortgage insurance) that came with your original loan
- You've since gotten married or divorced, and you want to add or subtract someone from the loan
How soon can you refinance a home after purchase?
The answer may be "sooner than you think," although it depends on the refinance program you're looking for, the loan type, and if any penalties apply. It may seem foolish to refinance soon after you went through the process and paid closing costs on your original mortgage, but in some cases, it could save you big money over the life of the loan.
Although you can technically refinance immediately, some lenders may require you to wait months before refinancing with the same company. If taking advantage of better terms is your main consideration, the path may be clearer. Here are some mortgage refinance rules and time frames to consider:
- A cash-out refinance, in which you are borrowing extra funds against your home equity, typically has a six month waiting period (and you probably don't have that much equity invested in that short timeframe anyway).
- If you went into mortgage forbearance or had your original loan restructured to allow you to skip or temporarily reduce monthly payments, you may be required to wait up to 24 months before refinancing.
- If your original mortgage was funded with an FHA loan and you want to refinance it with an FHA Streamline Refinance, you'll be asked to wait 210 days from the original closing date.
- It's typically easier to qualify for a straightforward rate and term refinance as they rarely have a waiting period.
- Even if your current mortgage rate is only slightly higher than today's rate, a small drop could save you thousands of dollars over the life of your loan. You'll reap more long term benefits if you refi sooner rather than later when rates might not be this good.
- Some loan products have penalties for prepayment if you refinance your loan within the first three to five years.
How long are you planning to stay in your home?
Answering this question will help you determine if refinancing will even make sense financially. Why? Like your original mortgage, refinancing will require an appraisal, an inspection, and closing costs — somewhere in the range of 2% to 5% of the loan value. Will you be in the home long enough to recoup those fees?
Let's look at a hypothetical situation: Imagine your current mortgage is $1500 a month, but you're thinking of refinancing. Closing costs and other fees are estimated to come to $4800, but your monthly payment is expected to drop by $200 a month. With an annual savings of $2400, you'd only start to see real savings after two years.
Do you intend to stay in your home for at least that long? Refinancing might make sense. If you are not planning to stay put for more than a couple of years, your potential savings may not cover the cost of refinancing. Obviously, your math will differ.
Consider your credit report
Taking out a mortgage can impact your credit report, and if you haven't had your home for very long, you've probably not made enough monthly payments to boost your score yet. Applying for a refinance loan shortly afterward pings your credit report once again and could affect your eligibility. This could make it challenging to get a new loan to replace the old one or negatively impact the rate you're offered.
Is the time right?
Refinancing is totally worth it if the time is right, and it can be an easy, straightforward process when you work with an experienced local loan officer.