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How Soon Can You Refinance a Mortgage?
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If you recently took out a home loan, you may not yet be wondering: “How soon can you refinance a mortgage?” However, there may be a good reason to refi, even if you’re only a few months into repaying your home loan.
Proceed cautiously, though, if you’re considering a refinance soon after a home purchase. In some cases, it could save you money. In others, it might be too expensive to be worth the effort and time.
How soon can you refinance a mortgage?
Determining how soon you can refinance a mortgage relies heavily on calculating your break-even point. This calculation, in which you divide your total refi costs by your monthly savings, tells you how long it would take you to recoup your refinance costs. The result is the number of months you should stay in your home to make a refinance worthwhile.
For example, if your refinance closing costs total $7,000 and the mortgage payments on your new loan will save you $200 a month, you’d divide $7,000 by $200 to get 35. Your break-even point is 35 months, or about three years. If you don’t plan to stay in your home longer than that, a mortgage refi may not be a financially sound move.
When you can refinance a mortgage by loan type
Depending on the type of mortgage you have, you might have minimum wait times. Plus, each lender may enforce its own seasoning requirements for how long you must keep your original mortgage before applying for a refinance.
|Loan type||How soon can you refinance?|
How often can you refinance your mortgage?
There are no concrete rules on how often you can refinance your mortgage; however, because there’s a cost to refinance, it’s wise to refinance only when it’s financially beneficial to do so. Keep your break-even point top of mind each time you consider a mortgage refi.
Refinance closing costs can range from 2% to 6% of your loan amount, and it can take at least a few years to recoup those costs. There’s also a new “adverse market refinance fee,” which equals 0.5% of the loan amount, going into effect Dec. 1, 2020, for most conventional loans.
You might opt for a no-closing-cost refinance to avoid paying out of pocket at closing. Instead, your lender will either charge a higher interest rate or increase your loan amount to cover what’s owed.
Reasons to get a mortgage refinance
It may feel like a huge hassle to refinance your mortgage after recently leaving the closing table, but there are some situations where it may be worth considering.
Your credit score has dramatically increased
Perhaps you’ve disputed errors on your credit report and are getting negative information removed. Or maybe you’ve paid down a significant amount of your non-mortgage debt. Or maybe more time has simply passed since a past bankruptcy or foreclosure.
If your credit score has jumped, you may be eligible for a lower interest rate that could reduce your monthly payment and save you money over the life of your loan.
Your interest rate is no longer competitive
Mortgage rates have repeatedly hit record lows in 2020, so it’s possible that a refinance could save you thousands in interest over the long term. Just be sure your mortgage refi rate is more than 0.5% lower than your current interest rate, otherwise, your monthly savings may not be significant enough to justify paying for a refi, and it’ll take longer to reach your break-even point.
Let’s look at an example, using a 30-year fixed-rate mortgage on a $200,000 home with a 20% down payment, resulting in a $160,000 loan amount. The original mortgage rate is 3.75% and the borrower was able to lock in a 3.25% rate on a new, 30-year loan.
|Original Mortgage||Refinanced Mortgage|
|Total interest paid||$106,754.58||$90,678.84|
The monthly payment savings are just about $45 when the rate drops by 0.5%, which may not move you enough to go through with a refinance. But a bigger rate reduction — perhaps 0.75% or lower — can shrink your monthly payments and interest expenses.
You suddenly need a lower monthly payment
A change in financial circumstances could push your mortgage payments into unaffordable territory.
If you just closed on a 15-year mortgage and need some relief, you could refinance to a 30-year loan and save a few hundred dollars on your monthly payments, depending on the size of your loan.
You’ve reconsidered your adjustable-rate mortgage
If you took out an adjustable-rate mortgage (ARM) and your variable rate is making your payments too expensive, it may be time to refinance into a fixed-rate mortgage.
You’ll trade the unpredictability of an ARM for the stability that comes with having a set interest rate for your entire loan term.
You can remove mortgage insurance
Private mortgage insurance (PMI) is required for borrowers who make less than a 20% down payment at closing.
With a conventional loan, you can typically call your lender and request to have your PMI payment removed once you reach 20% equity. No refinance is needed in that situation.
The situation is different, however, if you have a loan backed by the Federal Housing Administration (FHA). You’ll be stuck paying FHA mortgage insurance for the life of your loan unless you:
- Put at least 10% down at closing, in which case the mortgage insurance premiums can be canceled after 11 years.
- Refinance into a conventional loan after you’ve built at least 20% equity.
You want to tap your home equity
If you’ve built up a significant amount of equity in your home and want to access a chunk of those funds to make home improvements, buy an investment property or consolidate high-interest debt, a cash-out refinance may be worth thinking about.
A cash-out refinance comes with a larger loan amount than your existing mortgage, so expect to pay higher upfront costs and potentially more in interest over your loan term.
You’re getting divorced
If you took out a joint mortgage with your spouse and you’re no longer together, refinancing is one of only a few ways to remove a name from a mortgage. In some cases, you may qualify for a mortgage assumption instead.
3 factors to consider before refinancing
Even if you fit into one of the scenarios above, watch out for these issues before refinancing your home loan:
- Will you have room in your budget for the upfront costs? A mortgage refinance has many of the same upfront costs as a standard mortgage. As mentioned earlier, these costs can fall somewhere in the range of 2% to 6% of the loan amount. That means even if you’re able to secure a lower mortgage rate, you need to be sure your long-term savings offset the upfront expense.
- Will you have a prepayment penalty? Your mortgage may also come with a prepayment penalty, in which case you’d be charged a fee for paying off your mortgage early. Some mortgages also come with recapture rules, which require you to reimburse the lender for any money they’ve paid on your behalf, particularly for no-cost loans, if you pay the loan off ahead of schedule.
- Will you save or spend more over time? It’s crucial to consider the overall cost of your new mortgage. For example, if you extend your loan term by refinancing from a 15-year into a 30-year mortgage, you’ll lower your monthly payments but will likely pay thousands more in interest over the life of the loan. It’s also possible that refinancing could make your home equity grow more slowly, which may net you less money when you sell your home or limit how much home equity you can borrow later.