How Soon Can I Refinance My Mortgage?
But the fact is, there might be a good reason to refinance even if you’re only a few months into your mortgage, and there is no law preventing you from doing so.
There may be added costs and other negative consequences, so a quick refinance is something to consider carefully before you dive in. This article explains some of the situations in which it might make sense, as well as some of the potential pitfalls to watch out for.
Why you might want to quickly refinance
Although it may feel like a huge hassle to refinance if you’ve just recently closed on a mortgage, there are some situations in which it may be worth considering.
Here are some of those situations to keep an eye out for.
Interest rates took a sudden dive
If interest rates drop significantly soon after you take out your mortgage, it’s possible that refinancing could save you a lot of money over the life of the loan.
The upfront closing costs will eat into that savings though, so you generally should plan to be in your home for a significant amount of time after refinancing. And the interest rate decline generally needs to be greater than 0.5% in order for a refinance to make sense, said Arielle Minicozzi, CFP® and co-founder of Sphynx Financial Planning.
“If rates decrease, the earlier into the term you refinance the more interest you are able to save,” Minicozzi said. However, she also noted that since closing costs on a refinance can be $4,000 or more, you may end up paying more over the life of the loan by refinancing than keeping the existing loan.
You suddenly need a lower monthly payment
Life can come at you fast, and a change in financial circumstances could mean that a monthly payment that was affordable just a few months ago may no longer be so easy to fit into your budget. This might be especially true if you took out a shorter-term mortgage.
If you just closed on a 15-year mortgage and you have change in family status or a loss of income, you could refinance to a 30-year mortgage where the payments are more manageable month-to-month, Green said.
A longer mortgage might cost you more in interest over the term of the loan, but in some cases it may be the only way to continue being able to afford the home.
Your credit score dramatically increased
There are a number of reasons why your credit score might increase quickly in a short amount of time.
Disputing errors on your credit report and getting negative information removed would certainly help. Paying down significant amounts of debt could lead to an increase within a matter of weeks. Simply having time pass since a bankruptcy, foreclosure, or collection may result in a jump in your score.
If your credit score does significantly increase, you may be eligible for a lower interest rate that could lower your monthly payment and save you money over the long-term.
You reconsidered your adjustable rate mortgage
If you took out an adjustable rate mortgage and have since reconsidered that decision, it may be worth refinancing so that you can lock in a relatively low, fixed rate.
“We are expecting rising interest rates, which means your mortgage rate will increase over time,” said Linda Y. Leitz, CFP®, co-founder of Peace of Mind Financial Planning. “Even if you got a ceiling in the mortgage that you feel like you can live with, you may be better off refinancing now while you can lock in a rate.”
You can remove PMI
If you don’t put 20% down when taking out your mortgage, it’s likely that you’ll have to pay for private mortgage insurance, or PMI.
With a conventional loan, you can typically call and request to have your PMI payment removed once you reach 20% equity. No refinance is needed in that situation.
The situation is different, however, if you have an FHA loan: if you put at least 10% but less than 20% down, you’ll have to pay for mortgage insurance for the first 11 years no matter what your equity is. If you put less than 10% down, your mortgage insurance payment lasts for the entire life of the loan.
In that case, the only way to get rid of that payment sooner is to refinance.
“If you now have 20% equity because of market increases and payments you’ve made, it’s probably worth refinancing or seeing if the mortgage lender will remove the PMI based on an updated appraisal,” Leitz said.
You have a change in marital status
If you took out a joint mortgage with your spouse and you’re no longer together, refinancing may be the only way to take that person off the loan.
“When you own a property jointly, it is easy to remove a co-owner by filing a quit claim deed for the title,” said Minicozzi. “But when you hold a joint loan with a spouse, oftentimes the only way to remove him or her from the mortgage is by refinancing.”
You want to tap your equity through a cash-out refinance
If you made a significant down payment when taking out your mortgage and you have since decided that you’d prefer to use some of that money for something like making home improvements, paying for college tuition, or consolidating debt, it may be worth considering a cash-out refinance.
A cash-out refinance comes with significant up front costs, so it’s not something that should be done lightly. However, it could be a way to finance those needs with a relatively low interest rate.
What to watch for before refinancing
Even if you fit into one of the situations above, refinancing isn’t a no-brainer. There are several things to watch out for before diving in.
The biggest pitfall is the potential cost. Refinancing has many of the same up front costs as taking out an initial mortgage, so you can expect to pay somewhere in the range of 2% to 5% of the loan value in upfront fees. That means that even if you’re able to secure a lower interest rate, it may be several years before that savings offsets the upfront costs.
Your mortgage may also come with a prepayment penalty, in which case you’d have to pay a fee for the privilege of paying the mortgage off early.
Green also warns that some mortgages come with recapture provisions, which essentially say that you’ll have to reimburse the lender for any money they’ve paid on your behalf if you repay the loan in full within a certain number of days.
“For example, if you finance your home using a zero closing cost mortgage, the lender pays all your cost for you, and then you refinance your loan within 90 days or 180 days, the lender may have the right to demand that you repay the money that they spent in your name,” Green said. “Recapture policies vary from lender to lender, so it’s a good idea to ask about your lender’s recapture policy.”
It’s also important to look at the total cost of the loan over time. While refinancing from a 15-year mortgage to a 30-year mortgage should decrease your monthly payment, you’ll also likely end up paying a higher interest rate over a longer period of time, which means that your total interest cost could be significantly higher.
Beyond the costs, it’s possible that refinancing could make your equity grow more slowly, which could make it harder to sell your home down the line. Refinancing multiple times within a short period could also hurt your credit score, given that it would require multiple hard inquiries.
The bottom line
While refinancing soon after taking out a mortgage could be a smart move, it’s important to proceed cautiously. In some cases it could save you money or allow you to continue affording the home, and in other cases it may be too expensive to be worthwhile.
“I encourage you to speak with a lender directly, because although there is a lot of terrific information on the internet, that information is general in nature,” Green said. “Talk with a professional about your specific situation.”