By Jim AkinHow Soon Can I Refinance My Mortgage?
Quick Answer
How soon you can refinance a mortgage depends on the original loan terms and the type of refinancing you seek. Expect to wait a minimum of six months and up to 24 months.
Recent ups and downs in mortgage interest rates have home borrowers considering refinancing—replacing their existing home loan with a new one to get better loan terms, even if their existing loan is only a few months old. How soon is too soon to refinance? That may depend on your current loan contract and the type of refinance you want to pursue. Read on for more details.
How Soon Can I Refinance My Mortgage?
You can refinance your mortgage in as little as 30 days with most conventional mortgages. Some government-backed mortgages have "seasoning" requirements, meaning you must hold the loans for periods ranging from seven to 12 months before refinancing.
Exceptions that shorten these requirements may apply. Individual lenders may impose their own requirements, so check your loan contract and consult your loan servicer to clarify the specifics of your situation.
In addition to restrictions specific to your mortgage contract, some special cases also impose delays before you can begin a refinance.
Learn more: How Does Refinancing a Mortgage Work?
Cash-Out Refinance: 12 Months After Closing
A cash-out refinance combines a new mortgage with a cash loan backed by your home equity, which can be used for home improvement projects or any other purpose you choose. The vast majority of single family home loans issued in the U.S.—conforming loans with terms that make them eligible for purchase by government-sponsored enterprises Fannie Mae and Freddie Mac—require you to make at least 12 on-time payments before you can qualify for a cash-out refinance.
Modified Loan: 12 to 24 Months After Modification
If your lender has granted you hardship relief in the form of a mortgage modification, lowering your monthly payment amount or extending your repayment term, you typically must wait 12 to 24 months from the modification date before seeking to refinance.
FHA Streamline Refinance: 7 Months After Closing
If you have a mortgage backed by the Federal Housing Administration (FHA), commonly referred to as an FHA loan, you may apply for a streamline refinance from an FHA-approved lender seven months (210 days) after closing on the original loan.
FHA streamline refinances carry the same fees and other closing costs as other FHA loans but waive requirements for proof of income and other financial documentation.
Reasons to Refinance Soon After Buying a House
Refinancing soon after obtaining your original mortgage can serve any of several purposes:
Get a Better Interest Rate
If you bought your house when mortgage rates were high, refinancing when rates are lower could reduce the total amount you'll pay over the life of the loan. Additionally, if your debt-to-income ratio (DTI) or credit score has improved significantly since you took out your loan, you might qualify for better overall terms from your lender.
Convert From an ARM to a Fixed-Rate Loan
If your current loan is an adjustable-rate mortgage (ARM), refinancing to a loan with a fixed interest rate could save money and make your financial life more predictable.
Learn more: Pros and Cons of an Adjustable-Rate Mortgage
Reduce Monthly Payments
If your current mortgage payment is stretching your budget, refinancing to a new loan with a longer repayment term could lower your monthly payment. It will also likely increase the total cost of the house by increasing the amount you'll pay over time in interest.
Get Rid of Mortgage Insurance
Conventional mortgages typically require private mortgage insurance (PMI) if you put down less than 20% of the loan amount at closing, and some government-backed loans require a monthly mortgage insurance premium unless you make a down payment of at least 10%.
If your home's market value has increased quickly, or you gain the means to put more down on a new mortgage, refinancing without the burden of mortgage insurance could save you money.
If you replace an existing FHA loan less than three years old with a new one, via the FHA streamline refinance process, you must still pay mortgage insurance on the new loan, but you can get a partial refund on the original loan's upfront mortgage insurance premium.
Get Cash
A cash-out refinance combines a new mortgage with a home equity loan, which you can use for any purpose you choose. Your home equity typically must be greater than 20% for you to qualify for a cash-out refinance, so unless you made a hefty down payment on your original loan or your home's market value has risen very quickly, you may not have sufficient equity for a cash-out loan within the first few years of your loan.
Learn more: Pros and Cons of a Cash-Out Refinance
Add or Remove a Co-Borrower
If you got your mortgage based on your own credit and income, and wish to reapply with a co-borrower (such as spouse), refinancing is the way to do it. Doing this could mean better borrowing terms, since both of your incomes will be considered with the application.
On the other hand, if you obtained your current mortgage with a co-borrower and wish to have the other party removed from the loan (in the case of a divorce, for example), refinancing under your own name or with a different co-borrower can accomplish that.
Pros and Cons of Refinancing
Before refinancing your mortgage, it pays to consider the potential benefits and drawbacks of doing so.
Pros
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Lower interest rate: Probably the single greatest potential benefit of refinancing a mortgage is to reduce the interest rate on the loan. If interest rates have decreased, your credit has improved or a combination of both, refinancing could help you drastically reduce how much interest you'll pay.
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Eliminate variable interest rate: Replacing an ARM with a fixed-rate loan is likely to save you money over the life of the loan while giving you predictability in your budgeting.
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Lower monthly payments: If your payments are too much of a stretch, refinancing to reduce your monthly obligation can make your finances more manageable, although you'll likely end up paying more for your house in the long run.
Cons
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Closing costs: A refinance is a new loan, and the issuer (even if it's the same lender who issued your existing mortgage) typically charges closing costs of 2% to 6% of the loan amount. This origination fee and other closing costs may be negotiable, and are traditionally due in cash when you close on the new loan. "No closing cost" refinance offers typically add these fees to the new loan, so you'll pay them off, with interest, over the life of the loan, potentially adding thousands of dollars to the overall cost of the mortgage.
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Potential prepayment penalty: Some mortgage contracts indicate that you must make a balloon payment of several thousand dollars if you repay in full less than three to five years after taking it out (or even if you pay in full any time before the end of your repayment schedule). This prepayment penalty is typically collected even if you refinance with the same lender that issued the original loan. You may be able to add the penalty amount to your new loan, but doing so will add significantly to the overall cost of the refinance.
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Delayed equity accumulation: Mortgage installments consist of payments toward principal and interest, and only the principal portion adds to your home equity—the portion of the home you own outright. Mortgage payments are also amortized, which means initial payments mostly consist of interest charges, with a relatively small share of principal. In each successive payment, the share of principal increases and the interest share decreases, so you accumulate a greater amount of home equity with each payment. By resetting the amortization clock, a refinance slows down the rate at which you amass home equity.
Is Refinancing Worth It?
Whether or not refinancing is worth it depends on your specific circumstances and future plans.
When refinancing may be worthwhile:
- You plan to live in the home for a long time.
- You have an adjustable-rate mortgage.
- You are struggling to make your mortgage payments.
- Your credit has improved and may qualify you for a lower interest rate.
- You want to get cash out of your home.
When refinancing may not be worthwhile:
- You already have a low interest rate.
- Interest rates have increased since you took out your loan.
- You plan to move out of the home in the near future.
- Your credit hasn't changed or it has decreased since you got your mortgage.
- You already have a fixed-rate mortgage.
- You're comfortably making your mortgage payments.
How Refinancing Affects Your Credit Score
Refinancing your mortgage could have a range of impacts on your credit, from a very small impact to a potentially large impact. Here are some ways your credit can be affected by refinancing your mortgage:
- Hard inquiry: Most refinances require a hard inquiry into your credit. While a single hard inquiry may only decrease your credit score temporarily by a few points, applying for a new loan shortly after taking out your original mortgage could have a compounding negative impact.
- Reduced length of credit history: Adding a new loan to your credit profile reduces the average age of your credit accounts. By closing your original mortgage, you lose any length of credit history that you've built and replaced it with a new loan.
- Increase in overall debt: Taking out a cash-out refinance means adding additional debt to your debt load. This increases your amounts owed which can also negatively impact your debt-to-income ratio, for example.
- Potential for missed payments: If you miss a payment on your old mortgage during the refinancing process, your credit score could drop.
The Bottom Line
Depending on when you bought your house during the interest ups and downs of recent years, refinancing your mortgage at a lower interest rate, or converting an adjustable-rate loan to one with a fixed interest rate, could save you a substantial amount over the life of your loan. Do the math to understand your potential savings, keeping in mind the closing costs on the new loan. Before you apply for a refinance (or any new credit), checking your FICO® ScoreΘ for free from Experian can help you know where you stand.
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About the author
Jim Akin
Jim Akin is freelance writer based in Connecticut. With experience as both a journalist and a marketing professional, his most recent focus has been in the area of consumer finance and credit scoring.
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