|Erik J. Martin|
The Mortgage Reports Contributor
March 15, 2022 – 15 min read
How soon can you refinance a mortgage?
Maybe you just bought a house, or even refinanced recently. But it might not be too soon to refinance again.
Many homeowners can refinance into a lower–rate loan with no waiting period. And others need to wait as little as six months. So there’s a good chance you’re eligible to refinance at today’s rates.
Here’s how soon you can refinance
If you have a conventional mortgage, you can typically refinance into a lower interest rate as soon as you want. However, you’ll have to wait six months if you want a cash–out refinance or a Streamline Refinance.
· Conventional refinance (no cash out): No waiting period
· Cash-out refinance: 6–month waiting period
· FHA or VA Streamline Refinance: 210–day waiting period
· USDA refinance: 6–12 month waiting period
Here’s a closer look at the rules for each type of refinance loan.
Conventional loan refinance rules
If you have a conventional mortgage – one backed by Fannie Mae or Freddie Mac – you might be able to refinance immediately after closing your home purchase or a previous refi.
Keep in mind many lenders have a six–month “seasoning period” before a current borrower can refinance with the same company. So you’ll likely have to wait if you want to refinance with the lender you’re already using.
You can often get around the six–month seasoning rule by simply refinancing with a different lender.
But you can often get around that six–month refi waiting period by simply shopping around and refinancing with a different lender.
While it’s rare, some lenders charge a prepayment penalty fee that could derail your refinance plans. Check to see if your current loan has a prepayment penalty clause before moving forward.
It’s recommended that you shop around before refinancing, in any case, to make sure you’re getting the lowest rate possible.
Cash–out refinance rules
If you’re hoping to do a cash–out refinance, you typically have to wait six months before refinancing regardless of the type of home loan you have.
In addition, a cash–out refinance usually requires you to leave at least 20 percent equity in the home.
So before you can use a cash–out refi, you need to be sure you’ve built up enough home equity to make one worthwhile. If you made a large down payment – or if your home has appreciated in value – you may already have enough home equity to qualify.
Government loan refinance rules
The rules are a little different if you have a government–backed mortgage. This includes FHA, USDA, and VA loans.
With a government loan, you have the benefit of being able to use a Streamline Refinance. Streamline refinancing, such as the FHA Streamline Refinance or VA IRRRL program, cuts down the time and paperwork associated with a refi so you can get a lower rate faster.
However, you have to wait six to seven months before using a Streamline Refinance to replace your original mortgage. And you must have a recent history of on–time mortgage payments.
It’s better to refinance sooner rather than later
It’s never too early to think about refinancing your home loan.
“There is no minimum time wait. A mortgage is a contract. As soon as you can get a better deal, you should terminate the contract and take that better deal,” says Realtor and real estate attorney Bruce Ailion.
Closing attorney Chuck Biskobing says there are no major risks to refinancing within a year or so of purchasing.
“I’ve seen people refinance three times in a year to follow falling interest rates,” says Biskobing.
“Say you want to apply the money saved each month back to the loan in the form of accelerated payments toward the principal,” he says. “If so, you will almost certainly pay off the new loan faster than the old loan. And you’re not adding enough time on the loan to really matter.”
In other words, you’re not resetting your loan term by much if you’re just six or eight months into the mortgage.
But if you’re much further into your loan – say five to 10 years – resetting to a new 30–year mortgage may not pay off.
To find out if a refi is worth it based on your remaining term, try this refinance calculator.
When is a refinance worth it?
“What’s most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings you’ll earn?” says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says “best candidates” for refinancing are:
· Those with high mortgage rates relative to a new lower rate
· Those who intend to stay for a long time in their home
· Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you don’t have to pay upfront.
That “higher” interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Example: Cut your interest payments by $29,000 with a refi
Your previous home buying or refinance process wasn’t easy. There was a lot of red tape involved, and the closing costs were expensive. So why would you want to repeat all those steps again?
There are plenty of good reasons.
First, you may be able to save a lot of money on interest if you qualify for a lower rate.
· Say you recently closed on a $250,000 mortgage for 30 years at a 4.5% fixed rate
· Assume you now have the opportunity to refinance at 3.75%, resetting the 30 years
· You’ll save close to $100 a month on your monthly mortgage payments
· Add that up over 30 years, and you will have paid almost $29,000 less in interest
If you count on staying put for a while, this strategy is usually worth it.
“It makes sense to refinance if the interest payment savings make up for all the related costs and fees associated with closing a new mortgage,” says Cororaton.
Other good reasons to refinance
Another reason to refinance is that you can lower your monthly payment.
In the previous example, that owner could save nearly $100 a month by refinancing. That kind of green adds up fast. And it can make a big difference as your financial situation changes.
Maybe a baby is on the way. Perhaps you want to buy a new car. Or you’re seeking to put away more money toward a college fund. These are all important motives to reduce your mortgage payments with a lower interest rate.
Refinancing sooner versus later can also be a good strategy if you:
· Want to take extra cash out (tap your home equity) to pay for something big like home improvements
· Want to use equity for debt consolidation, paying off high–interest credit cards or personal loans
· Want to switch from an adjustable–rate mortgage to a safer fixed–rate mortgage
· Need to take a partner off your loan due to a recent separation
· Have an FHA loan, which requires mortgage insurance premiums, and you want to eliminate those extra payments. A conventional won’t require private mortgage insurance (PMI) if you have at least 20 percent equity in your home
· Have seen a boost in your credit score recently; you may qualify for an even lower refinance rate with a higher credit score
Yes, you could save money by getting lower monthly payments. But a mortgage refinance loan can also help you with bigger–picture financial goals.
How soon can you refinance a house after buying it?
In many cases there’s no waiting period to refinance. Your current lender might ask you to wait six months between loans, but you’re free to simply refinance with a different lender instead. However, you must wait six months after your most recent closing (usually 180 days) to refinance if you’re taking cash–out. And homeowners using a government–backed Streamline Refinance program typically have to wait 210 days.
Can you buy a house and immediately refinance?
If you have sufficient credit and home equity, and you’re using a conventional refinance loan, you might be able to refinance right after buying. Just remember that refinancing involves paying closing costs. So it might not be attractive to do so right after paying the down payment and closing costs on your home purchase.
Does refinancing hurt your credit?
When you refinance, mortgage lenders check your credit report using a hard credit pull. A hard pull can knock a few points off your score. However, you can get refinance quotes from multiple lenders without having multiple credit dings. As long as you get all your quotes in a reasonable shopping period (2–4 weeks), all credit inquiries during that time count as a single event. So the effect on your credit will be minimal – typically 5 points or less.
How can I avoid closing costs on a refinance?
There are two main ways to avoid closing costs when you refinance. First, you can look for a no–closing–cost refinance, which typically means the lender covers your closing costs in exchange for a higher interest rate. Or, you may be able to roll closing costs into your new loan balance. Technically, you still pay closing costs with this method. But they’re financed along with the rest of your mortgage, so you don’t owe anything out of pocket on closing day.
How much does refinancing cost?
Refinancing costs are similar to closing costs when you buy a house – about 2–5 percent of the loan amount on average. So if you refinance with a current mortgage balance of $200,000, it would likely cost about $6,000–$10,000. However, when you refinance, you have the option to roll closing costs into your mortgage or get a no–closing–cost loan with a slightly higher interest rate. So you might not have to pay those costs out of pocket.
How long does it take to refinance a house?
Refinancing typically takes between 30 and 60 days. When you refinance, you have to fill out a mortgage application, provide documentation, go through underwriting, and often wait for a new home appraisal. That means it takes about as long to get a refinance loan as it takes to get a home purchase loan. Government–backed Streamline Refinance loans – which often don’t require an appraisal – may close faster.
How many times can you refinance your mortgage?
You can refinance your mortgage as many times as it makes financial sense to do so. The only caveat is that you might have to wait six months from your most recent closing (whether it was a purchase or previous refinance) to do it again. Also, remember that refinancing includes closing costs. Those typically equal 2–5 percent of the loan amount, which is enough to deter most people from refinancing every time interest rates fall.
Is it worth refinancing to save $100 a month?
That depends. Take a look at an example: Say you refinance to save $100 per month, and it costs you $3,000 in closing costs. It would take 30 months (or 2.5 years) to break even with what you spent to close. After that, you’d start seeing net savings. So if you planned to stay in the house more than 2.5 years after your refi, it might be worth saving $100 per month.
What is the downside of refinancing your mortgage?
One big downside of refinancing your mortgage is that the loan starts over. Unless you can afford a shorter loan term with a bigger monthly payment, there’s a good chance you’ll be paying it off, with interest, for a longer time. However, this might not matter if you plan to move before the loan is up (which most homeowners do). Another downside of refinancing is that there are closing costs. So you have to weigh your potential savings against what you’ll owe at the closing table.
Does refinancing start your loan over?
Yes. When you refinance, you’re opening a brand new mortgage loan. So you start your repayment schedule over at day one. However, you have the option of choosing a shorter loan term when you refinance if you wish. For instance, you could refinance from a 30–year mortgage into a 15–year mortgage and pay off the loan much sooner. Just be aware that a shorter loan term means you’ll have a larger monthly payment.
What’s the difference between a cash-out and no-cash-out refinance?
A cash–out refinance allows you to receive cash–back at closing. This cash is borrowed from your home equity. In order to receive cash–back, you’ll take out a larger loan amount than what you currently owe. The difference between your original loan amount and the new one is your cash–back amount. A no–cash–out refinance typically only changes your interest rate and monthly mortgage payment. You will not increase your loan size or receive cash back at closing.
Can you refinance if you have bad credit?
Sometimes. If you have an FHA loan, for example, you could get an FHA Streamline Refinance loan without a credit check – assuming you have made the last six months’ payments on time and that you’re able to get a lower refinance rate or lower monthly payments in the process. A VA loan also has its own Streamline refinance program, the VA IRRRL. But you’d need to go through the credit qualification process to get a cash–out refinance or to get a new type of loan: Replacing an FHA loan with a conventional loan without PMI, for example, would require a 620 credit score or higher.
What’s the catch with refinancing?
When you’re getting phone calls, emails, and postcards claiming you can save thousands of dollars by refinancing, it’s normal to wonder, “What’s the catch?” Closing costs are the big upfront catch, so be sure you’ll be saving enough long–term to justify this upfront cost, even if you’re able to roll closing costs into your loan. With a refinance, you also risk stretching out your interest for a longer period of time which could be costly – especially when you’re starting over on a new 30–year loan.
No need to worry about refinancing “too soon”
Refinancing is worth it if you discover that you can save monthly or over the life of the loan.
Most mortgage shoppers aren’t at risk of refinancing “too soon” and can apply even shortly after their previous loan closes.
Check your refinance savings and don’t miss out on lower housing costs.