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Mortgage Basics

When Can I Refinance My Home?

How soon you can refinance your mortgage depends on the lender you use and the type of refinance you want. And while it's possible to refinance a mortgage soon after taking out the first one, there are other factors to consider before you apply.

Refinancing a mortgage involves replacing your current mortgage with a new loan. The process can help you take advantage of lower interest rates, lower your monthly payments with a longer term, allow you to take some of the equity you have in your home, and more.

Before you pull the trigger on a refinance, however, here are some things to consider.

When Can I Refinance My Home?

Depending on the situation, it's possible to refinance a mortgage loan immediately. In some circumstances, however, you may need to wait:

  • If you want to do a cash-out refinance and gain access to some of the equity you have in the home, the waiting period can be at least six months after your current mortgage loan closed.
  • If your original loan was modified to make payments more affordable, you might need to wait up to 24 months before you can refinance it.
  • If you want to refinance an FHA loan with an FHA Streamline Refinance, the waiting period is 210 days.

Even if you can refinance your loan shortly after getting it, there are some things to consider before you do so.

For starters, some mortgage lenders have pre-payment penalties that kick in if you refinance your loan or sell your home within three to five years. Also, getting a mortgage can affect your credit scores, so if you apply for a refinance loan shortly afterward, it could influence your qualification requirements, making it difficult to get a new loan to replace the old one.

Finally, some lenders may require a waiting period between loans, which can limit your options when looking for a loan with the best terms for your needs.

When Is It a Good Idea to Refinance Quickly?

While the idea of refinancing a mortgage soon after getting the first one may sound odd, there are some clear benefits that can make it an excellent choice in certain circumstances:

  • Lower monthly payments: If your financial situation has changed and you need a lower monthly payment, refinancing could make it possible to get a loan with a longer term. And if interest rates have dropped since you first got the loan or your credit score increased dramatically, qualifying for a lower interest rate could also reduce how much you owe each month.
  • Eliminated private mortgage insurance (PMI): Conventional mortgages typically require PMI if you put down less than 20% of the loan amount at closing. If, however, the value of your home increased quickly or you've made a large payment and qualify to get rid of it, refinancing could save you money. Also, some government-insured loans charge mortgage insurance, and refinancing one into a conventional loan could get rid of it.
  • Change in interest rate structure: Borrowers can choose a fixed- or adjustable-rate mortgage (ARM). While an ARM can save you money upfront with a lower fixed interest rate for a set period, it becomes variable once that period ends. If you notice that interest rates are rising and want to lock in a low fixed interest rate to avoid taking on too much risk, refinancing can allow you to do that.
  • Equity cash-out: If you need cash fast and want to avoid high-cost loans, doing a cash-out refinance will give you access to some of the equity in your home at the cost of the new mortgage loan.
  • Borrower removal: If you were recently divorced and both spouses were on the loan, it may be a good idea to refinance the mortgage into the name of the person who plans to live in the home.

What Should I Consider Before Refinancing?

While refinancing a mortgage loan can provide a lot of benefits, there are some things that could make you think twice about starting the refinance process:

  • Loan costs: Mortgage loans, including refinance loans, typically include closing costs that can range from 2% to 5% of the loan amount. If your mortgage is $200,000, that's between $4,000 and $10,000 that can eat into the potential savings or other benefits you'd get from refinancing. It's essential that you take the time to calculate your potential savings from a refinance compared with the costs to close the loan.
  • Other costs: If you're refinancing your loan to get rid of one form of mortgage insurance, it's possible that the new loan will require another form. Make sure you understand the terms of each mortgage type to get an idea of what your ongoing costs will be. Also, pre-payment penalties can make it difficult to get out of your original loan.
  • Credit situation: If your credit scores have changed since you got your first loan, it could affect your chances of getting approved for a refinance loan with more favorable terms. The same goes if your debt-to-income ratio (DTI)—your monthly debt payments relative to your monthly gross income—has increased in the meantime.

There are many good reasons to refinance a mortgage loan, but carefully consider these things to make sure your reason is good enough.

Will Refinancing Affect My Credit Score?

Virtually every time you apply for a loan, the lender will run a hard inquiry on your credit report. This inquiry can knock a few points off your credit score. If you're applying for multiple mortgage loans, each additional inquiry can have a compounding effect on your score, dropping it further.

As a result, it's best to do all your rate shopping in a short period (typically between 14 and 45 days), during which all your inquiries will be counted as one for credit scoring purposes.

Also, closing out your old mortgage loan and replacing it with a new one can negatively affect your credit score because it lowers the average age of your credit accounts.

Because refinancing can have an impact on your credit, it's important to make sure your credit is in good shape before you start the process.

Next Steps

If you're planning to refinance your mortgage loan and understand both the benefits and drawbacks, compare multiple lenders to ensure you get the best terms available.

Also, take your time when weighing the savings or other benefits against the costs of getting the new loan. While it may make sense in the short term to refinance, there are some situations where it could cost you more in the long run.

As you go through the process, check your credit score regularly to keep track of where you stand and address any potential issues that arise and can hurt your chances of getting approved.

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