How Soon Can I Refinance My Mortgage?
Drastic changes, such as a sudden drop in interest rates, may make it expedient to refinance a mortgage early.(GETTY IMAGES)
IF YOU’VE HAD YOUR mortgage for a while or have built equity in your home, you may have thought about refinancing your mortgage. How soon you can refinance depends on the type of mortgage you have. It also depends on the type of refinance you’re interested in.
How Soon Can You Refinance a Mortgage?
There are a few different types of mortgage refinancing options available, depending on the details of your situation.
- A “cash-in” refinance allows you put a lump sum of cash toward your home’s mortgage principal so your new mortgage balance is smaller.
- A “rate-and-term” refinance keeps your home’s mortgage principal the same in the new loan but changes the terms or interest rate of the loan.
- A “cash-out” refinance allows you to take out some of your home’s equity but adds to the principal on the new loan.
Special loan programs, like Federal Housing Administration loans, may have varying time requirements for when you’re able to refinance, based on the type of refinance. For example, you must have made at least 12 monthly payments on your FHA loan to be eligible for an FHA cash-out refinance. However, an FHA Streamline Refinance requires a minimum of six monthly payments and for your FHA loan to be at least 210 days old.
“Unless you are on a special loan program, there isn’t usually a timeline of when you can refinance if you are going with a different lender,” says Joseph Polakovic, owner and CEO of Castle West Financial, an investment advisory and retirement planning firm in San Diego.
However, the new lender may probe you about your reasons for refinancing.
“For the most part, the new lender wants to be sure they are not going to get in trouble for churning the homeowner into unnecessary fees, like new loan origination fees and other closing costs,” says Polakovic.
Although you may technically be able to refinance immediately, you should be able to clearly identify how refinancing your mortgage may benefit your financial and life goals.
When Does It Make Sense to Refinance a Mortgage Early?
There’s no universal “right” reason for refinancing a mortgage. There are a few common situations that may make a mortgage refinance an option, even if you’re not very far into your loan term.
A Sudden Drop in Interest Rates
A dramatic fall in mortgage rates can mean thousands of dollars in savings. For example, let’s say you purchased a $500,000 home and put a 20% down payment of $100,000. With a fixed mortgage rate of 4.702%, you’d spend $347,012 in interest alone over the next 30 years.
If, after nine years, you refinance into a new mortgage with a principal amount of $270,000 at a fixed rate of 3.952% for 30 years (assuming $6,000 in closing costs), refinancing would save you $793 per month. Your lifetime savings would be $45,171.
When deciding whether a rate drop is worth refinancing, it’s important to evaluate your break-even point. This point is the number of months it would take you to recoup the cost of refinancing, based on your monthly refinance savings.
A Recent Income Change
A lot about your employment status can change over the years. Unexpected and financially destabilizing events, like a job loss or pay cut, are everyday realities that can affect your ability to pay your mortgage.
If your income changed significantly, you may want to look into refinancing as a way to lower your monthly payments by extending your loan term. However, you should keep in mind you may pay more interest over the long term.
A Substantial Credit Score Increase
Your credit score is one of the main factors that influences your mortgage rate. A credit score boost of a few points might not be enough to justify a refinance, but if your credit score spiked in a short time, you might be eligible for a lower rate.
Your score might experience a jump because you recently paid off a large debt or a bankruptcy mark on your credit report just expired. You may also have noticed a major error in your credit report that has been weighing down your score since your first took out your mortgage.
Mike Cornelius, branch manager at Motto Mortgage Experience, a loan origination company in Brea, California, had a client who was interested in refinancing a mortgage and also planned to pay off a significant amount of debt in the next two months.
The client had good credit but stood to increase it to excellent after resolving the debts. That person was then able to take advantage of a 0.25 percentage point savings on interest, so it made sense to wait just a bit for much greater savings, Cornelius says.
You Experience a Marital Status Change
Another scenario where a mortgage refinance might be an option is if your marital status has changed. Your current mortgage contract may not permit changes in the named borrower on the loan.
Whether you recently got married and want to include your partner in the mortgage contract or got divorced and need to have an ex-spouse removed, that can be done by obtaining a new loan.
You Want to Cash Out Equity
Cashing out some of the equity of your home through a refinance is a helpful way to get money. When you take out the new loan, you’ll borrow more than your existing loan and use the difference as you need. The amount you can borrow is typically 80% to 85% of your home equity.
You’re free to use the cash toward whatever you need, such as a home improvement project, medical treatment or consolidating debt. Borrowing against your home’s value can be risky, so do your due diligence by speaking to a mortgage professional to ensure it’s a wise move for you.
You Want to Switch From an Adjustable-Rate Mortgage
Refinancing your mortgage might be an option if you’d like to change from an ARM to a fixed-rate mortgage. An ARM may offer a rate that’s lower than the market for a defined time but may adjust up or down afterward, depending on the market.
If you want to switch to a more consistent monthly payment, for example, you might turn to refinancing as a way to secure a new fixed mortgage.
Although there are many reasons you may want to refinance, there are serious implications and costs associated with doing so.
What Should You Consider Before Refinancing Your Mortgage?
Depending on what your purpose is for refinancing, there can be disadvantages that can impact your financial goals and even thwart the savings benefits.
Refinancing a mortgage comes with upfront costs. You’ll need to pay for many of the same kinds of closing costs you paid for on your first mortgage, like origination fees, appraisal fees and lending fees.
Some mortgages charge a prepayment penalty for paying off the entire loan early, which adds to the overall cost. If your lender imposes a penalty, it typically applies if you refinance within three or five years. It’s a good idea to take a look at your contract to factor any penalties into consideration before refinancing your mortgage.
Cornelius advises borrowers to really dive into the numbers to ensure refinancing is worthwhile, particularly if you don’t plan on keeping your home for more than three years.
“However, if (borrowers) are planning on keeping the home long term and maybe even using the home as an investment property down the road,” says Cornelius, “it might make great financial sense to get the costs of their home down as low as possible so their long-term investment potentially pays greater dividends.”
It’s useful to plug all of your numbers into a refinance calculator to help you see how much you stand to save per month, your break-even point compared with refinancing costs, and your lifetime savings through refinancing.
Being informed about all of your mortgage options, and the pros and cons of refinancing, early in the process is essential to making a decision you can feel comfortable with moving forward.