Times You Should Reconsider Refinancing A Mortgage
Wondering whether now is the right time to refinance your home loan? We explore five times it makes sense to refinance a mortgage.
11 Dec 2018
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Your Credit Has Improved
Your credit is a significant factor in determining your mortgage rate. Generally speaking, the better your credit is, the lower the interest rate youll receive.
Lets look at an example based on recent interest rates. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO® credit score is within the 660 to 679 range, the myFICO Loan Savings Calculator estimates you could pay 3.375% APR .
With this interest rate, your monthly payment would be $663 and your total interest paid across 30 years would amount to $88,732.
In comparison, if your credit score was in the 700 to 759 range, the calculator estimates your monthly payment would drop to $631 . And over the life of the loan, you could save more than $11,500 in interest.
How Often Can You Refinance Your Home
Theres no limit on the number of times you can refinance
What you should consider before refinancing multiple times
How to decide if this is an ideal time to refinance
Refinancing your mortgage can be an effective money-saving strategy, and theres technically no limit on the number of times you can refinancebut that doesnt mean you should be rushing to refinance on a regular basis. Each refinance comes with a unique set of pros and cons, and you need to be sure that the savings you stand to gain from your new loan outweigh the upfront costs involved with refinancing. Even if its not your first refinance rodeo, you should still do your due diligence in measuring the upfront costs against the long-term benefits before you saddle yourself to new debt.
If you need to refresh your refinance IQ, you can check out our step-by-step refinance guide or common refinancing myths. Otherwise, lets cover some of the basic questions about repeat refinancing: how often can you do it, and how do you decide if its a sound financial decision?
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Can You Decline An Approved Mortgage Loan
Mortgage lenders have different guidelines when it comes to how soon after buying a home you can refinance the loan. Some lenders will give you a loan almost immediately while others may make you wait. Generally, lenders base how soon you can refinance your mortgage loan on the amount of equity you have in your home rather than on how long youve owned the home.
TL DR
In order to refinance a home, you must have equity in it, so unless you made a large down payment when you purchased the home, you’ll have to wait until you build equity to refinance it.
Usda Loan Refinance Rules
The U.S. Department of Agriculture has a loan program to help individuals in rural areas buy homes with no down payments and low interest rates. These come in the form of either direct loans or loans through private lenders guaranteed by the USDA.
The USDA offers three different types of refinances: non-streamlined, streamlined, and streamlined-assist.
- For a streamlined or non-streamlined loan, you must have made on-time loan payments for 180 days prior to your loan application.
- To be eligible for a streamlined-assist refinance, you must have made on-time loan payments for 12 consecutive months prior to your loan application.
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How Soon Can You Get A Cashout Refinance Loan
Many homeowners question how long they must keep their present mortgage before they may refinance for cash.Most lenders need a 6-month waiting period after closing on the first mortgage before approving a cashout refinance if you have a conventional, FHA, or VA loan.Youre also eligible for a Streamline refinance with FHA and VA loan programmes, although youll have to wait 210 days in most cases. These loans, however, do not allow for cash back after closing. A USDA refinance could take 612 months to complete, and USDA loans do not allow cash out. More information about refinancing waiting periods can be found here.
How Soon Can You Refinance A Home After Purchase
The answer may be sooner than you think, although it depends on the refinance program youre 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:
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Rules For Refinancing Fha Loans
An FHA loan is a mortgage insured by the Federal Housing Administration. The FHA has several types of refinances, each with its own rules.
If you want to get an FHA refinance to borrow more than you owe and take the difference in cash, you’re looking at an FHA cash-out refinance.
If you don’t want to take cash out, and you’re willing to get an appraisal, you may choose an FHA rate and term refinance or FHA simple refinance.
If you have an FHA loan and want to refinance into another FHA loan without getting an appraisal, an FHA streamline refinance may be what you’re looking for.
Alternatives To Selling After Refinancing
If you arent sure that selling after refinancing is the right move for you, there are some alternative options to consider.
One option is to avoid refinancing until you sell the home. If you know that you are planning to sell the home in the near future, then you might skip refinancing to the best possible terms. Although it might be painful to miss out on the absolute best terms on the market, this move leaves you financially unencumbered when it comes to selling on your preferred timeline.
If you arent willing to pass up a refinance, thats okay. There are other alternatives to selling the home. One is to convert the property into an investment property. If you rent out the property, it might be possible to cover the mortgage payments for the foreseeable future. For reluctant property renters, consider looking for a property manager to cover the day-to-day while you hold onto the property for the long term.
Additionally, you could ask your lender for a loan modification. In this case, the lender will adjust the terms of your loan, including the interest rate and loan term, without an official refinance. Usually, this is a more affordable option than refinancing.
Some lenders also offer no-closing-cost refinances. With this option, you would pay a higher interest rate over the life of your loan. But you wont have to pay for closing costs upfront. If you are planning on selling the home immediately, this could save you money in the short term.
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Why Would You Want To Refinance A Mortgage Right After Purchase
When someone asks us, Can I refinance right after buying a home? the answer is yes, but with reservations. Many lenders will require at least a year of payments before refinancing your home. Some refuse to refinance in any situation within 120 to 180 days of issuing the loan. The more money you put into your home, the easier it will be to refinance, regardless of when you do it. Ideally, you should pay at least 20% of the homes value before you seek to refinance to make qualifying a more straightforward process.
Only a couple of situations justify refinancing soon after you buy your home. These typically deal with major changes in your life or finances. Even if you experience a change that might warrant a rapid refinance of your mortgage, always talk to your lender, first to get personalized advice. Here are some reasons you might need to refinance soon after buying:
Find The Best Refinance Rates
To find the best refinance rates, youll have to do some work, but it wont take much time. Look at banks, credit unions and online comparison sites. You also can work with a mortgage broker if you want someone to do the legwork for you and potentially get you access to lenders you wouldnt find on your ownlenders that might offer you better terms.
Submit three to five applications to secure formal loan estimates. The government requires the loan estimate to show your estimated interest rate, monthly payment and closing costs on a standard form that makes it easy to compare information across lenders.
On page 3 of the loan estimate, youll see the annual percentage rate, and on page 1, youll see the interest rate. When youre buying a car, it usually makes sense to pick the loan with the lowest APR, because APR includes a loans fees.
With mortgages, its different. The APR assumes that you will keep the loan for its full term. As weve already seen, that doesnt usually happen with home loans. You might be better off with a loan that has a higher APR and a higher monthly payment but no fees.
Instead of putting cash toward closing costs, you could keep that money in your emergency fund or use it to pay down debt with a higher interest rate than your mortgage.
Another problem is that if youre comparing the APRs on a 30-year and a 15-year loan, the 15-year loan might have the higher APR despite being much less expensive in the long run.
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How Soon Can I Refinance After Buying A House
If youve recently bought a house, or are looking to in the near future, rising interest rates shouldnt come as a surprise. However, the rate you have right now doesnt have to be the rate you have forever. If youre looking to reduce mortgage payments, increase home equity, or refinance an adjustable-rate mortgage to fixed, you may wonder: how soon can I refinance after buying a house? Before making any decisions, consider reasons to refinance your home, and decide which is most important to youthis will help you to select the best option moving forward, whether its a conventional refinance, FHA refinance, VA refinance, USDA, or jumbo.
You Can Sort Of Diy Shortening Your Loan
We also received advice that we could stay at a 30-year mortgage, but make monthly payments as if it was a 15-year mortgage , bypassing any paperwork. But, by doing that, the loan wouldnt have the lower rate, and those higher payments would be based totally on discipline. We decided that wasnt a great fit for us, but depending on current rates, it might be a great fit for you.
Now, Id love to hear your experiences! Have you ever refinanced? Was the goal a shorter loan, lower payments, or perhaps an equity loan? And how do you feel about the paperwork involved? Does it seem like my timing estimates were an exaggeration? Are you speedy at this kind of thing? Any other advice you would add for someone thinking about refinancing?
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Refinancing 25 Years After Buying A House
Last year at this time, about two and a half years after wed bought The Treehouse, we started talking about refinancing. Mortgage rates were dropping, and our mailbox was full of refinance offers. We had a 30-year fixed mortgage, and wondered if we could refinance at a better rate, and lower our monthly payment. We were also curious about using some of the equity of our house to get funds for home improvement projects.
But we didnt know anything about refinancing, or what the numbers would really look like for us. These are the 10 things we learned:
Does Your Mortgage Have A Prepayment Penalty
A prepayment penalty is a fee your lender can charge you if you pay your loan off early. A prepayment penalty can be expressed as a percentage of the principal balance or a specified number of months interest. This can result in an additional fee of thousands.For example, if you have a 3% prepayment penalty and a principal balance of $200,000, the prepayment penalty would be $6,000.
Prepayment penalties are limited for mortgages that donât meet certain standards by a new law effective January 2014 in accordance with the Dodd-Frank Act of 2010. But the law is not retroactive. If you refinanced before 2014, you may still havea prepayment penalty.
Also, the new law doesnât apply to all mortgage types. If you have excellent terms on your mortgage, you may still be subject to a prepayment penalty if you financed after 2014 and your new mortgage meets all the following requirements:
- The loan rate is not higher than The Average Prime Offer Rate . The Average Prime Offer Rate changes constantly and is basedon average interest rates, fees and length of loan terms offered to highly qualified borrowers.
- The loan is a Qualified Mortgage. A Qualified Mortgage has better terms such as a loan period of no more than 30 years and no risky features such as interest-only payments.
- The loan rate will not increase such as a fixed-rate loan.
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The Shorter The Term The Lower The Rate
Though our original goals for refinancing werent panning out, in our research, we learned that if we refinanced to shorten the term of the mortgage from 30 years to 15 years, we could get an even better mortgage rate. Our focus shifted: instead of thinking about lowering our monthly payment, we took a longer view, and realized we would save substantially more by shortening the length of the loan, and taking advantage of the low rates.But, going from 30 years to 15 yearseven at a better mortgage ratewould raise our monthly payments by 25 percent. Which as you know, was not at all our original goal. So this wasnt a no-brainer for us, we had to think about it.
How Do You Know If You Have A Prepayment Penalty
By law, your lender is required to disclose any prepayment penalty fee on your monthly mortgage bill, your mortgage payment coupon book if you have one, and any communication you receive from your lender about your loan, including information about payments and interest rates. Your mortgage note should also clearly disclose the prepayment penalty fee in your contract.
If you refinanced after 2014 and you have a prepayment penalty listed on your mortgage correspondence, check to make sure it hasnât expired already. It shouldnât last more than three years from the time of refinancing. If itâs stillon your correspondence and itâs been more than three years since you refinanced, contact your lender and ask them to remove it. It shouldnât be there anymore.
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How Often Can You Refinance
Theres no limit on the number of times you can refinance your home loan. During times when mortgage rates are falling fast, some homeowners do so several times in just a few years.
But youll likely find yourself constrained by three factors:
None of those means you should avoid refinancing when its to your advantage but it can get expensive so its best to be strategic.
Cost Vs Benefit: Should I Refinance
Obviously, you need to be sure you can afford the costs of refinancing and those can add up.
But its also a good idea to work out whether the benefits of a new mortgage are worth the costs. Youll find refinance calculators online that can help with this. But the arithmetic is fairly simple:
Thats a break-even calculation. It helps you understand how long it will take for the savings of your refinance to cover the costs.
Theres no right or wrong answer for what constitutes a good break-even period. Thats entirely up to you to decide, based on your personal financial situation. But if its several years distant, you may want to think carefully and take some advice before pushing the button on your home refinance.
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