Refinancing a mortgage is a great way to save money and, for many people, the perfect next step to take in owning a home – but how soon can you refinance a mortgage?
This is a tricky question to answer because it depends on a lot of variables, such as the type of mortgage loan you have and what your monthly payments look like.
So, we’re here to help. In this guide, we’ll discuss how soon you can refinance your mortgage. We’ll provide some tips to help you figure out your timeline as well as go into whether refinancing is the right choice for you.
Ready to learn the answer to the question, how soon can you refinance a mortgage? Let’s get started!
Reasons to Consider Refinancing Your Mortgage Loan
Here are some of the most common reasons why you might consider refinancing your mortgage loan.
Credit Score Increase
One of the most common reasons for refinancing is because your credit score has dramatically increased. This could be because you have paid off a significant portion of your other debt or because you disputed errors on your report. Whatever the case may be, refinancing might make sense if you want to reduce your monthly payment and save money over the life of your loan.
Need to Tap Into Home Equity
Another common reason why people choose to refinance is to cash out on their home’s equity. If you need cash fast and want to avoid a high-interest or high-cost loan, refinancing your mortgage will let you tap into some of your home’s equity at the cost of the new loan.
Poor Original Interest Rates
While your mortgage rate might have been competitive at the time, time’s they are a changin! And your interest rate might not be so great compared to others anymore. If your mortgage refinance interest rate is more than 0.5% lower than your existing interest rate, it could be worth it – otherwise, it’s probably not worth the extra hassle.
Remove Private Mortgage Insurance (PMI)
If you put less than 20% down as a down payment at closing, you will be required to add on private mortgage insurance. If you have a conventional loan, you can have the PMI payment removed after you’ve reached 20% equity with no refinancing necessary.
Other types of loans, like FHA loans, will require you to pay their version of PMI for the life of the loan unless you refinance into a conventional loan (or put at least 10% down at closing).
Adjustable-Rate Mortgage Loan vs. Fixed Rate Mortgage
Adjustable-rate mortgages, or variable-rate mortgages, can sometimes make your monthly payments too expensive. In that case, refinancing into a fixed-rate mortgage with more stability could be smart.
Need a Lower Monthly Payment
If you have a change in financial circumstances that make your previously affordable monthly payments no longer so affordable, refinancing might make a lot of sense. This will allow you to convert a 15-year mortgage into a 30-year one, for example.
Divorce
If you just got a divorce and both spouses were listed on the loan, refinancing might be a good idea. This will allow you to put the mortgage in just the name of the person who intends to live in the house.
Questions to Ask Before Refinancing Your Mortgage
There are several things you should consider before making the decision to refinance.
One is whether the loan costs will be worth it. All mortgage loans, including refinance loans, include closing costs that can range from 2% to 5% of the original loan amount – so even if your mortgage is only $100,000, that could be a significant chunk of change. You’ll want to take time to calculate potential savings before you refinance.
Not only that, but if you’re refinancing to get rid of one form of mortgage insurance, there’s a good chance that the new loan will require a different form anyway -so be sure you understand the terms and conditions of each one to get a clear idea of what the costs will be.
Last but not least, it could affect your credit situation. If your credit scores changed since your first loan, it could affect your chances of being approved for a loan with more favorable terms (just as it would if your debt-to-income ratio has increased, too).
How Soon Can You Refinance a Mortgage?
If you just took out your mortgage loan, there’s a good chance that refinancing immediately probably isn’t the smartest choice. However, that varies.
When you can refinance will depend not only on what you hope to get out of refinancing but also the type of mortgage loan you have.
There’s a simple calculation you can use to help you figure this out, though. You’ll need to calculate your break-even point. This can be done by dividing your total refinancing costs by your monthly savings – this will tell you how long it will take you to recoup the refinance costs over time. This will tell you how many months you should stay in your home to make the refinance worth it.
If your break-even point is three years and you don’t plan on living in your home past those three years, then obviously, refinancing probably isn’t the wisest choice financially or logistically.
When to Refinance a Mortgage: A Guide By Loan Type
In addition to calculating your break-even point, there are minimum wait times in place for refinancing most types of loans. Each lender may tack on additional requirements on top of that, so be sure to check in before you start going through the process of refinancing to make sure you aren’t violating any contractual agreements you may have made.
FHA Loan
An FHA loan is backed by the Federal Housing Administration and intended to help low- or moderate-income home buyers purchase their home with lower down payments and credit score requirements.
There are several different refinancing options for this type of loan, with qualifications to refinance varying depending on which one you choose.
Generally, for an FHA loan, you will need to wait at least seven months for a streamline refinance or 12 months for a cash-out refinance. There are some exceptions though – for a simple refinance in which you refinance your existing FHA loan to a new FHA loan, you must have just made six months of on-time payments.
VA Loan
A VA loan is originated or guaranteed by the U.S. Department of Veterans Affairs. It’s meant for military members and veterans to buy homes with zero down payment. They often come with better interest rates and terms than conventional loan options and also do not require private mortgage insurance.
There are two types of refinance loans you can get with a VA loan – a cash-out refinance and an interest rate reduction refinancing loan. You must wait at least 210 days past the first mortgage payment and be up to date on all of your payments.
Jumbo Loan
A jumbo loan is a mortgage that is larger than the lending limits set by Freddie Mac and Fannie Mae. In most places, that’s $548,250 for a single-family home but in certain high cost of living areas, it can be higher than $800,000.
The refinancing rules are similar for jumbo loans – however, there’s no set amount of time to wait before you can refinance since the loans aren’t backed by Freddie Mac or Fannie Mae. Because of that, each refinance will be subject to the individual lender’s requirements.
USDA Loan
If you live in a rural area, you may have received a mortgage loan known as the USDA, or United States Department of Agriculture, Loan. This loan program is meant to help people in rural areas purchase homes with zero down payments and relatively low interest rates. They come directly from the USDA or from loans through private lenders.
With USDA loans, there are non-streamlined, streamlined, and streamlined-assist refinances. If you plan on applying for a non-streamlined or streamlined loan, you must have made payments for at least 180 days prior to applying. For a streamlined-assist refinance, 12 months is the waiting period.
Conventional Loan
There is no set-in-stone rule as to how much time you must wait before attempting to refinance your conventional mortgage – you could theoretically do it as soon as you buy your home.
However, the vast majority of lenders prohibit homebuyers from immediately refinancing with the same lender.
How Often Can a Mortgage Be Refinanced?
Generally speaking, there are no rules on how often you can refinance a mortgage – though this might vary some among mortgage lenders.
Since there is a cost to refinance though, particularly in terms of closing costs, it’s a good idea to only refinance when it is significantly financially beneficial to do so.
Closing costs can be up to 5 or 6% of the original loan amount – it will take you a few years to recover those costs. That said, there are some refinance loans that have no closing costs, instead charging a higher interest rate or increasing the loan amount to cover what is owed.
Will Refinancing Affect My Credit Score?
Refinancing will affect your credit score, but not necessarily in a negative way.
When you apply for a loan, the lender will run a hard inquiry on your credit report. This can knock a few points off your score, with each additional inquiry having a compounding effect.
That shouldn’t totally deter you from applying for a refinancing loan – but it should stop you from doing it repeatedly. Do all your rate shopping in a short period, within 14 to 15 days, which will count all of your inquiries as one hard inquiry rather than multiple for credit scoring purposes.
Also, make sure your credit is in excellent shape before you start shopping around, and keep in mind that closing out your old mortgage loan and replacing it with a new one can negatively affect your credit score, at least temporarily. That’s because it will lower the average age of your credit accounts.
Next Steps in Refinancing Your Mortgage
Are you thinking about refinancing to help you lower your mortgage payments or for some other reason? If so, it’s important that you understand both the drawbacks and benefits before you dive headfirst into the process.
Then, contact multiple lenders to get a quote. You want to make sure you’re getting the best terms and mortgage payments available!
Take the time to weigh whether the savings of refinancing are worth the cost of acquiring the new loan. It might make sense to refinance if the new agreement will help save money – but if it’s going to take you a decade to see any impact, you might want to hold off on refinancing for now.
Is Refinancing my Mortgage Right for Me?
It’s always worth exploring refinancing options, even if you aren’t sure whether it’s the right choice for you. If you’re going to owe debt, it always makes sense to see if there are ways to make that debt cheaper! And in most cases, it doesn’t matter when you bought your home – refinancing can often be a great way to lower your monthly payments or allow you to get a cash advance on your home equity.
In the event that you need to refinance your mortgage, there are a few things you should do before making the decision. You will want to make sure that this is going to be beneficial for your financial situation and not just an impulse buy because of low interest rates or a competitive offer.
Financial experts always say that the best time to refinance your mortgage is when you are in a financial pinch. However, refinancing can be complex and confusing – so it’s important to do your research before making any decisions. Follow these tips for finding the right time to cash out, refinance, or make any other changes to your mortgage loan – and you will be successful each and every time.
