In this article:
While mortgages can be refinanced immediately in certain cases, you typically must wait at least six months before seeking a cash-out refinance on your home, and refinancing some mortgages requires waiting as long as two years. Time limits depend on the nature of your original mortgage and the type of refinancing you seek.
Beyond these time restrictions, there are other practical concerns to consider before deciding if refinancing—the process of taking out a new home loan to replace your existing one—makes sense for you.
When Can I Refinance My House?
Some conventional mortgages allow immediate refinancing, but there are special cases that impose delays before you can begin the process:
Allowed at least six months after closing on your original mortgage. 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.
Allowed 12 to 24 months from closing. If your lender agreed to a mortgage modification that lowered your monthly payment amount or extended your repayment term, the modification agreement typically requires you to wait 12 to 24 months from the modification date before seeking to refinance. You can seek a mortgage modification in the event of financial hardship, and many lenders granted them to borrowers who experienced income reductions during the COVID-19 pandemic.
FHA Streamline Refinance
Allowed a minimum of 210 days after closing. If you have a mortgage backed by the Federal Housing Administration, commonly referred to as an FHA loan, with at least six months' worth of on-time payments, you may apply for a streamline refinance from an FHA-approved lender on the six-month anniversary of your first payment, or seven months (210 days) after closing on the original loan. FHA streamline refinance loans are subject to fees and closing costs comparable to those charged on FHA loans but have less stringent requirements with respect to proof of income and other financial documentation.
When Is It a Good Idea to Refinance Quickly?
Refinancing soon after obtaining your original mortgage can serve any of several purposes:
- To lower your monthly payments: A new loan with a longer repayment term may reduce the amount of your monthly payment (a tactic that typically means increasing the total amount you'll pay over the life of the loan).
- To 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 (MIP) 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.
- To change your interest rate: Replacing your current mortgage with one that has a lower interest rate can reduce the total amount you'll pay over the life of the loan. Similarly, replacing a variable-rate loan, with payments that can change annually, to a more predictable fixed-rate loan can save you money and simplify budgeting and other financial planning.
- To get cash: A cash-out loan that combines a new mortgage with a loan backed by your home equity can be used for home improvement projects or any other purpose you choose. Note that 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 mortgage or your home's market value has increased dramatically (and rapidly), you may not have sufficient equity for a cash-out loan after only six months.
- To add or remove a cosigner: If you applied for your original mortgage jointly with another person (such as a spouse) and wish to have the other party removed from the loan (in the case of a divorce, for example), you must seek refinancing under your own name or apply jointly with a different individual. Conversely, if you obtained your mortgage based on your own credit and income, and wish to reapply with a joint signer, refinancing will let you do so.
Is Refinancing Worth It?
Mortgage refinancing under the right circumstances can save you money, but getting better loan terms soon after obtaining your original mortgage typically requires some combination of factors to work in your favor:
- Prevailing interest rates have fallen. A significant drop in market rates may mean new loans are considerably more affordable than those on your current mortgage. This is not the case under current market conditions, which have seen the Federal Reserve hike institutional lending rates to combat inflation, and in which additional hikes are expected in the months ahead.
- Your credit improved significantly. If a major negative entry such as a bankruptcy or foreclosure has "fallen off" your credit reports (which typically happens after seven years), or if you've paid down a significant amount of revolving debt resulting in dramatically improved credit scores, you may qualify for a new loan with a lower interest rate.
- You have a co-borrower with strong credit. If you'll be adding another borrower (a spouse, for example) to your new mortgage application, the addition of their income and credit to the application could make you eligible for a lower interest rate if their credit history is good.
- You can increase the down payment on a new loan. If you've recently sold an asset, received an inheritance or otherwise gained access to cash you can use to put down significantly more than you did on your original mortgage, you may be able to secure a new loan with a lower interest rate and closing costs.
There are also potential drawbacks to refinancing a mortgage, especially if little time has passed since you secured your current home loan. These include:
- Closing costs: A refinance loan, like any other mortgage, typically includes closing costs of 2% to 5% of the loan amount. On a $300,000 mortgage, that's between $6,000 and $15,000 that you must either pay upfront or finance over the life of the loan—at the same interest rate that applies to the house itself.
- Other cost trade-offs: If your goal in refinancing your mortgage is to reduce costs, take care that you aren't simply trading out one set of expenses for another. For instance, if you're refinancing a government-backed loan to avoid a mortgage insurance premium, take care that your new loan doesn't require mortgage insurance.
- Prepayment penalties: Some mortgage contracts require you to make a substantial balloon payment if you refinance your loan or sell your home in the first three to five years of your repayment term. If these apply to your current mortgage, make sure to account for them.
How Refinancing Affects Your Credit Score
Refinancing a mortgage affects your credit scores, and doing so soon after taking on your first mortgage can amplify its impact:
- Applying for a mortgage refinance triggers a credit check known as a hard inquiry, which can cause a slight dip in your scores. You may see another small decline in scores after you accept the loan.
- Refinancing soon after obtaining a mortgage can cause a compound reduction in credit scores. Your credit scores typically rebound from the dip caused by your original mortgage application within a few months, but if you seek another mortgage within that time frame, your scores may not have time to recover fully—and the new application process will likely ding them further.
Credit score reductions related to new credit typically only total a few points, but, depending on your starting score, they could cause lenders to view your second application less favorably than your first, and to offer less favorable loan terms as a result.
The Bottom Line
Refinancing soon after you obtain a mortgage can save you money, but it's important to consider the costs associated with a new loan as well as its potential savings before moving ahead.
The influence of your credit scores on refinancing means you should approach the process the same as when applying for an initial mortgage. Check your credit scores before and during the process to know where you stand and, if appropriate, consider taking a few months to shape up your credit profile before you begin the refinancing process.