Mortgage Q&A: “How soon can I refinance my mortgage?”
With mortgage rates marching toward new all-time lows again, a lot of recent home buyers are probably asking this question, even those who just closed on their mortgage weeks ago.
After all, if your mortgage interest rate is a half-point or more above today’s new low levels, you might be leaving a considerable amount of money on the table.
And because you haven’t yet made a dent in your mortgage, there’s no fear of resetting the clock and starting all over.
There are of course closing costs to think about, including those you may have paid on your previous mortgage such as discount points, along with third-party costs like title insurance and appraisal fees, and so on.
But it could be a smart move to grab a new mortgage while rates are low, even if yours is still in its infancy.
Why Do You Need to Refinance Your Mortgage Right Away?
- Interest rates went down considerably
- Your borrower profile improved dramatically
- You want a different loan product
- A life event such as divorce occurred
- You paid cash and want your money back
First let’s talk about why someone would want to refinance their mortgage shortly after taking it out.
The most common and topical reason is because mortgage rates fell, substantially.
It’s impossible to time the market and buy a home at exactly the “right time” when it comes to mortgage rates.
Ultimately, they might be low or high when you buy, and there’s not much you can do about it if you need/want a home at a certain time.
The good news is you can always refinance your mortgage after the fact if rates improve enough to justify the move, assuming you qualify.
Another common reason to refinance rapidly is if your borrower profile improved dramatically.
Say you had marginal credit, but after six months of paying your mortgage and cleaning up your debt and other things, your scores jumped.
You now qualify for a lower rate and/or an entirely new loan product, such as a conventional loan as opposed to an FHA loan.
To that same end, you may have had a change of heart and want a product change, say from an ARM to a fixed-rate mortgage.
Perhaps you thought the 5/1 ARM was a good idea, then discovered you couldn’t sleep at night. Maybe the 30-year fixed is the only loan program for you.
If rates fell since you first took out your ARM, it could be possible to go from the uncertainty of an ARM to the predictability of a FRM without it costing you a dime.
Other reasons include wanting to drop PMI or cashing out equity, the latter of which could be of interest to an all-cash home buyer.
There’s also the possibility that you want to get a co-signer off the loan, or even the unfortunate event of divorce, which may require you to refinance to remove someone from the loan.
Anyway, there are always lots of reasons to refinance a mortgage, so now let’s talk about how quickly you can do it.
How Quickly Can I Refinance My Mortgage?
- It depends on the type of refinance
- And the type of loan you have and desire
- Rate and term refis may not require a waiting period
- Cash out refis generally require a wait of six months or longer
The answer to this question depends on the type of mortgage refinance in question, along with the loan type involved, and if any prepayment penalty applies.
Lenders would be skittish if you just took out your mortgage, only to turn around and ask for even more money a month later.
But if you’re simply looking to take advantage of better terms, the rules are a lot less restrictive.
With regard to prepayment penalties, some of which penalize you for refinancing in a short window of time, such as three years from origination, these are far less common today than they were a decade ago.
That mostly has to do with the Qualified Mortgage (QM) rule, which largely banned prepays. Before the mortgage crisis, they appeared on just about every home loan out there.
Refinancing Less Than Six Months After You Got Your Mortgage
- It’s possible to refinance almost instantaneously
- But there are some important things to consider
- Including lender-imposed restrictions
- Along with the loan originator’s compensation, which could be at risk
An issue that comes up a lot is a refinance request when less than six months have elapsed on the existing mortgage.
First, individual banks and lenders may impose their own overlays that require at least six months to have gone by.
Secondly, loan officers and brokers may tell you that you can’t refinance for X amount of time, say three to six months.
This has to do with their commission, which is subject to recapture by the lender if the loan doesn’t actually last long enough to be considered seasoned.
So if you refinance within six months of purchase, it could affect the compensation of the individual who helped you take out your loan.
Each lender may have different early payoff (EPO) rules that determine if and when a loan originator could lose their commission, and some lenders have even introduced EPO fee waivers to protect them.
This situation can also be avoided simply by waiting, which is ideal for everyone obviously, though it may not always be reasonable to do so, especially if rates are significantly cheaper and at risk of rising.
Check your paperwork to see if you signed anything regarding this and if you do refinance within this short window, you may need to use a different lender the second time around.
Refinance Waiting Period by Loan Type
Now let’s discuss specific refinance waiting periods by loan type and transaction.
Conventional Loans (Fannie Mae and Freddie Mac)
If we’re talking about a standard conventional mortgage, such as those backed by Fannie Mae and Freddie Mac, you can refinance almost immediately if the new loan doesn’t result in cash out.
In other words, if you’re simply executing a rate and term refinance, where the interest rate and/or term of the loan changes, it’s generally fine to refinance right away.
But if you want to tap into your equity via a cash-out refi, there is a six-month waiting period.
This prevents borrowers from underpaying for properties and then immediately sucking out the equity at a new inflated price.
However, there are some exceptions, such as if the property was inherited or legally awarded via divorce, separation, etc.
There’s also the “delayed financing” exception, whereby a cash buyer can execute a cash-out refinance if they purchased the subject property within the past six months.
But really the homeowner is just getting their initial investment back, less any down payment requirement associated with the mortgage they take on (such as 20%).
When it comes to government loans, the rules are a little different.
If you want to do a rate and term refinance on one FHA loan to another FHA loan (via the most common streamline refinance method), the waiting period is 210 days and six monthly mortgage payments must have been made.
There must also be a net tangible benefit, such as a mortgage rate 0.5% lower, or a reduced loan term that saves the borrower money.
There isn’t a waiting period via the lesser-utilized FHA Simple Refinance, which is an FHA-to-FHA rate and term refinance. But it isn’t as easy as the streamline and requires an appraisal.
In essence, most borrowers will need to wait at least six months to go from one FHA loan to another.
Of course, you could always refinance from an FHA loan to a conventional loan sooner, and maybe it would even be the better deal.
For FHA cash out refinances, you must have owned and occupied the property as your primary residence for at least 12 months.
And properties with mortgages must have a minimum of six months of mortgage payments.
The max LTV for FHA cash-out refis is 85%, meaning most wouldn’t have the required equity to cash out that quickly anyway.
Jumbo and Portfolio Loans
Since these lenders basically play by their own rules, their seasoning requirements can vary tremendously.
They may have absolutely no seasoning requirement, or they may impose their own guidelines that vary based on type of transaction.
But generally they will mirror the guidelines of Fannie and Freddie.
There is a 12-month seasoning requirement for the refinance of all USDA loans into new USDA loans whether streamlined or not.
The previous loan must have closed at least 12 months prior to the new USDA loan request.
The interest rate must also be at or below the mortgage rate on the existing mortgage.
Again, you can explore the option of refinancing away from the USDA into a conforming loan backed by Fannie or Freddie.
For VA rate and term refinances, the waiting period is similar to the FHA’s – the later of 210 days from the date the first mortgage payment was made or the date on which the sixth monthly mortgage payment was made.
Additionally, there must be a net tangible benefit, such as at least a 0.5% decrease in rate if going from one fixed mortgage to another.
For VA loans that include cash out, both of the seasoning conditions above must now be met.
The VA has cracked down on lender churning, which is the unscrupulous art of getting borrowers to refinance their mortgages over and over, even if it does little or nothing to help them.
How Many Times Can You Refinance Your Home?
- There generally isn’t a limit in terms of number of refinances
- Can do it as long as you meet underwriting guidelines and applicable waiting periods
- Be sure to consider all costs involved and whether it actually makes sense
- You should have a compelling reason to refinance each time
- A refinance is a great financial tool but should be used sparingly
If you’re asking this question, you might want to pump the brakes.
While lenders generally have no restrictions in terms of total number of refinances, it can be costly to serially refinance.
Sure, you can refinance your mortgage a second time, a third time, and so on.
But even if there aren’t any fees to refinance, each time you do it you’re essentially restarting your loan, which pushes you farther from the finish line.
This means paying extra interest, even if the mortgage payment is slightly lower. As I’ve said before, there isn’t really a rule of thumb for refinancing.
It totally depends on your unique financial situation, and what your plans are for the home, your life, etc.
If mortgage rates keep dropping significantly year after year, sure, a refinance might be warranted to take advantage of the savings.
But if you’re only shaving .25% or something minimal off your rate, do the math to see if it makes sense.
You should also have a compelling reason to go through with the refinance – if you don’t, maybe hold off and ask yourself who’s really benefiting, the lender or you.
That brings up an important point – make sure you’re actually benefiting from the refinance in question, and that you’ve done your diligence before proceeding.
Loan officers, brokers, and lenders make money when you refinance, but it may not always be in your best interest, literally.
Take the time to think about why you’re refinancing your mortgage, including what your short- and medium-term plans are for the underlying property.