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How Soon Can You Refinance a Mortgage?
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How soon can you refinance a mortgage? It depends on the type of mortgage, the type of refinance and the lender’s requirements. With some conventional loans, you can refinance any time, while some government-backed loans will require a year’s worth of payments.
You’ll also need to consider whether refinancing makes sense financially given the costs involved. The best way to do this is to calculate your breakeven point by dividing the total refinancing costs by your monthly savings. The result is the number of months you need to stay in the home before you recoup refinancing costs.
When can you refinance your home after buying it?
The timeline for how soon you can refinance a mortgage depends on the type of loan you have. Many lenders require that you have the loan for a certain length of time before refinancing, known as a “seasoning” period.
The type of 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 or a streamline refinance, only available for government-backed loans.
Here’s an overview:
|Loan type||How soon can you refinance?|
|Conventional loan|| |
|FHA loan|| |
|VA loan|| |
|USDA loan|| |
A conventional loan is one not backed by a U.S. government agency. How soon can you refinance after buying a house with a conventional mortgage? “In the case of a conventional loan, you can refinance a mortgage as soon as you would like,” says Peter Zomick, a senior director at Atlanta-based Silverton Mortgage. Lenders vary, however, so some may require a seasoning period of six months. If yours does, it’s possible to circumvent that by simply applying to another lender.
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.
The answer to “how soon can I refinance an FHA loan?” depends on the type of refinance you want. If you opt for a cash-out refinance, the lender will require you to make payments for 12 months.
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, a streamline refinance requires only seven months of payments. A streamline refinance is a type of refinance only available to government-backed loans that offers fewer paperwork requirements.
How soon can you refinance a VA loan? If you want a cash-out refinance of a mortgage backed by the U.S. Department of Veterans Affairs (VA), your lender will require you to wait seven months (210 days) or to have made six mortgage payments (using the longer time period).
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.
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.
However, 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. But although the amounts might be higher than conventional loans, Zomick explains that “jumbo loans are like conventional loans in that you may refinance whenever you want,” with any restrictions typically being lender-specific.
7 reasons to refinance your home loan
In general, people refinance to lower their payments or for other financial reasons.
You can get a better interest rate
The lower your interest rate, the lower your monthly payments and your overall payments over time. Be sure to do the math about how much a lower interest rate would save you vis-a-vis the costs of refinancing, though, to make sure it makes financial sense.
Your credit score has improved
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.
You want to change the loan term
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 amount, though the trade-off is you’ll accrue equity faster. In a 30-year, 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 per month. Conversely, if you have a 30-year, a 15-year mortgage can speed up your equity accumulation.
You want to change an ARM
If you have an adjustable-rate mortgage (ARM) and the interest rate adjusts to a higher rate, 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 to eliminate mortgage insurance payments
FHA loans typically require an annual mortgage insurance premium, but if you make a down payment of more than 10%, it may drop off after 11 years. USDA loans don’t require any down payment, but do require a monthly mortgage insurance payment for the loan’s duration.
Conventional loans only require private mortgage insurance if your down payment is less than 20%. 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 your home’s equity
In many places, home prices are appreciating, with home prices up nearly 24% between 2021 and 2020 alone. If you want to tap that equity for a home renovation or any other purpose, you can do it with a cash-out refinance.
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 after a divorce.
Planning a refinance? Consider these factors first
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 thus have to pay closing costs of 2% to 6% of your mortgage for a refi, just as you did for the initial mortgage. “Lenders are legally obligated to provide information about all costs and fees upfront,” notes David Aylor, founder and chief executive officer of David Aylor Law Offices in South Carolina — so be sure to “do the math and read the fine print before refinancing.” Most lenders will let you roll closing costs into the mortgage, but be sure to check and factor in the effect this will have on your payments.
→ 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 payments to recover the refinance’s costs and 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. If you purchased a home within the past 10 years, you likely have an interest rate that’s close to historically low levels. For a refi, make sure to do the math on any new rate.
→ Prepayment penalties. Some mortgages have prepayment penalties, which means your lender will charge a fee if you pay off your mortgage before its term ends. Be sure to check the fine print, as these penalties can affect the financial calculations for a refi.
→ The effect of a refi on your long-term outlay. It’s tempting to only consider monthly figures in a refi, but you’ll also need to calculate the effect on your long-term total payments. Replacing a 15-year mortgage with a 30-year, for example, can lower your monthly payments but cost you much more in interest charges over the life of the loan.