How Soon Can You Refinance a Mortgage?
With some types of conventional refinance loans, you can refinance within days of closing your purchase loan, while some government-backed loans will require a year’s worth of payments. It’ll depend on the type of mortgage, why you’re refinancing and the lender’s requirements.
Knowing the wait time for each refinance type will help you answer the question: How soon can you refinance your mortgage?
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When can you refinance your home after buying it?
You can refinance your loan days after you get your keys to your new home — as long as you qualify for a conventional rate-and-term refinance. However, many loan programs require that you wait a certain length of time before refinancing — this is known as a “seasoning” period.
The refinance option you choose also affects when you can refinance your mortgage — whether it’s a rate-and-term refinance to change your interest rate and term, a cash-out refinance to pocket the difference between your old and new mortgage or a streamline refinance exclusive to government-backed loans.
Here’s an overview of how soon you can refinance your mortgage based on the reason for your refinance and the loan type:
|How soon can you refinance?
A conventional loan isn’t backed by a U.S. government agency. You can refinance a conventional loan as soon as you’d like for a rate-and-term refinance, if there’s a financial benefit.
If you want a cash-out refinance, conventional lenders require a six-month waiting period. A cash-out refinance replaces your mortgage for one with a higher amount and takes advantage of equity in your home, allowing you to receive the difference between your new and old mortgages in cash.
However, if you want to refinance to a lower interest rate or a different type of mortgage, such as a fixed- or adjustable-rate mortgage, an FHA streamline refinance requires only seven months of payments. A streamline refinance is a type of refinance only available to homeowners with a current FHA loan. (Some added perks: You don’t need income documents and won’t need a home appraisal.)
How soon can you refinance a VA loan? If you apply for a VA cash-out refinance of a current mortgage backed by the U.S. Department of Veterans Affairs (VA), your lender will require you to wait seven months (210 days) before you close on the new loan.
VA loans also offer a streamline refinance to reduce interest rates, known as a VA interest rate reduction refinance loan (IRRRL), with the same seven-month (210-day) waiting period, or after six months of consecutive payments. Like the FHA streamline loan, you can skip the income and appraisal requirements.
With a loan backed by the U.S. Department of Agriculture (USDA), you’re required to make payments on time for a minimum of 12 months before the lender will accept a refinance application. USDA loans don’t offer cash-out refinancing, and streamlines are only offered in certain circumstances.
A jumbo loan is a mortgage whose amount exceeds the conforming loan limit in your area. They are a member of the conventional loan family, which means you can probably refinance a jumbo loan without a waiting period, if you qualify.
Why should I refinance my home quickly?
In general, people refinance to lower their payments or for other financial reasons.
YOU CAN GET A BETTER RATE
The lower your interest rate, the lower your monthly payments and your overall payments over time. Be sure to calculate your break-even point, to make sure the refinance makes sense. The break-even point is the number of months it takes to recoup your refinance costs. For example, if you pay $4,000 to save $150 per month, your breakeven is about 27 months.
As long as you stay in the home that long, the refi makes sense. If you sell your home before that point, it’s not worth it to refinance.
YOUR CREDIT SCORE IS HIGHER
A better credit score can net you a mortgage with better terms, like lower interest rates. If your credit score jumps significantly, it’s worth checking out whether you can reap the potential benefits.
Higher scores are needed to get the best rates in 2023.
You’ll now need at least a 780 credit score to get the best refinance rates on a conventional loan refinance — that’s a 40-point increase from the prior standard of 740.
YOU’RE CHANGING LOAN TERMS
Whether the loan term is a 15- versus 30-year mortgage affects both the monthly payment and the speed with which you build equity in the house. In a 15-year mortgage, you’ll generally pay a higher monthly amount, though the trade-off is you’ll accrue equity faster. On a 30-year loan, your monthly payment will be lower, but you’ll gain equity at a slower rate.
If you originally got a 15-year mortgage but find the payments challenging, refinancing to a 30-year loan can lower your payments by as much as several hundred dollars each month. Conversely, if you have a 30-year mortgage, a 15-year term can help you build equity much faster.
YOU’RE SWITCHING TO A FIXED-RATE LOAN
If you have an adjustable-rate mortgage (ARM) and the interest rate adjusts higher, your mortgage payments are going to climb. A refi to a fixed-rate mortgage can help you regain the stability of a fixed mortgage payment.
YOU WANT DROP MORTGAGE INSURANCE
FHA loans typically require an annual mortgage insurance premium, but if you make at least a 10% down payment, it’ll usually drop off after 11 years. USDA loans don’t require any down payment, but do require an upfront and annual guarantee fee that you’ll pay for the loan’s duration.
Conventional loans only require private mortgage insurance if your down payment is less than 20% — and when you reach 20% equity in your home, it isn’t required any more. So if you have either an FHA or USDA loan, you can wait until you hit 20% equity and then refi into a conventional loan to eliminate mortgage insurance payments.
YOU WANT TO TAP HOME EQUITY
If home values are on the rise in your area, you may want to tap that equity for a home renovation or some other purpose with a cash-out refinance. Just remember: The mortgage interest on the extra cash is tax-deductible if you use it to fix up your home.
YOU WENT THROUGH A DIVORCE
If you own a home jointly with a spouse, refinancing after divorce is a method of removing your spouse’s name from the mortgage permanently.
Is refinancing worth it for me?
When planning a refinance, be sure to consider whether it makes sense for you by considering the following factors:
→ Closing costs. A refinance pays off your existing mortgage and replaces it with a new one. You’ll usually have to pay closing costs ranging between 2% to 6% of your mortgage for a refi, just as you did when you bought your home.
→ How long you plan to stay in the home. A refinance only makes financial sense if you plan to stay in the home long enough for any lower monthly payments to recover the refinance’s costs and can begin netting the savings. Calculating your break-even point will help you determine this.
→ Interest rates. The financial advantage of refinancing depends very much on the interest rate on your refi versus the one on your existing mortgage. However, if you’re consolidating high-interest-rate credit card debt or paying off car loans with high payments, look at the overall payment savings, and not just the rate.
→ Prepayment penalties. Some mortgages have prepayment penalties, which means your lender will charge a fee if you pay off your mortgage before a certain period. They are rare in the standard mortgage programs we’ve discussed here, but may be an issue if you’re paying off a non-QM or hard money loan.
→ The effect of a refi in the long haul. It’s tempting to only consider monthly savings when you refinance, but you’ll also need to calculate the effect on the long term-costs. Replacing a 15-year mortgage with a 30-year loan, for example, can lower your monthly payments but also cost you thousands more in interest over the life of the loan.