You may be surprised by the speed with which you can refinance a mortgage after you bought your home or did your last home refinance. It can be a matter of months.
But the rules vary from one type of mortgage to another. So read on to find what you personally can do.Click here for today's mortgage rates.
How often can you refinance?
There’s no limit on the number of times you can refinance your home loan. During times when mortgage rates are falling fast, some homeowners do so several times in just a few years.
But you’ll likely find yourself constrained by three factors:
- Refinancing is not cheap. Unless you can do so using a streamline option (FHA and VA loans only; no cash out), you’re looking at several thousand dollars, often 2% – 6% of the new loan’s value. And “no-cost refinances” will almost always cost you down the line.
- Too much hassle. Only streamline versions are easy. The others take roughly as much time, administration and stress as getting your original mortgage did.
- You’re resetting your mortgage’s clock each time. Unless you refinance to a shorter term, you’re always adding to the period over which you’ll be paying back your mortgage. And the longer you borrow, the bigger the overall sum you’ll pay in interest.
None of those means you should avoid refinancing when it’s to your advantage but it can get expensive so it’s best to be strategic.
Reasons to refinance a mortgage
There’s a whole list of reasons why homeowners refinance a mortgage. Here are some of the most popular:
1. Eliminate mortgage insurance premiums
Conventional mortgages let you stop paying for mortgage insurance when your mortgage balance falls below 80% of your home’s market value. For some, that happens quickly because they live in areas where home prices are rising fast.
But government-backed loans from the FHA (Federal Housing Administration) and USDA (US Department of Agriculture) don’t let you do that. You’re on the hook for mortgage insurance premiums (MIPs) throughout the life of your loan. Well, nearly always: If you initially make a 10% down payment on your FHA loan, you can stop paying MIPs after 11 years.
But most borrowers with this type of mortgage have to keep paying until they sell the home or finish paying off their loan. Unless they refinance to a different sort of mortgage.
And that’s why so many of those with FHA and USDA loans refinance to conventional loans as soon as their mortgage balances reach 80% of their homes’ values. With MIP costing 0.85% annually of the mortgage value on FHA loans and 0.35% for USDA loans, they get to save a small fortune.
2. Lower monthly payments
Assuming you don’t shorten your loan term, your monthly payments will go down after a refinance. That’s true even if you change to a similar rate or one that’s slightly higher.
Here’s why: Imagine you refinance an existing 30-year mortgage to a new 30-year mortgage. If you’re already 10 years into yours, you’ll be spreading the total loan amount over 40 years of payments rather than 30. As a result, each of those payments will be smaller.
But be aware of the downside of doing this too often. Even with a lower mortgage rate, you’ll pay more interest in the long run if you borrow for a much longer period.
3. Change mortgage type
This arises most commonly for those with FHA loans seeking to get rid of mortgage insurance premiums, though there are other reasons a borrower might want to change their loan type.
For example, you might want a cash-out refinance but the sum you need would bust the loan caps for the sort of mortgage you have. You’d need to refinance to a jumbo mortgage that lets you borrow millions — providing you and your home qualify.
Of course, it may be that you can just get a lower rate or better deal with another type of loan. As your financial circumstances change through your life, the type of mortgage that suits you best may change too.
4. Cash-out equity
Cash-out refinancings got a bad rep during the credit crunch. Some borrowers were using their homes as ATMs.
But, used wisely, they can be a great way to access significant sums at very low interest rates. You might use the money to consolidate expensive debts that are crippling your cash flow or to pay unexpected medical bills or even to fund college or a major family event. You can use the money for anything, but most financial advisers warn against frivolous purposes or maintaining an unsustainable lifestyle.
With most mortgages (but not VA loans), lenders will want you to leave 20% of the equity in your home in place. So you can borrow the difference between your mortgage balance and 80% of your home’s value.
5. Remove a borrower
This usually arises when a married couple buys a home in joint names and then divorces. They agree on who keeps the home but whoever doesn’t get it understandably wants out of the mortgage loan.
However, lenders won’t see it that simply. Your lender approved the original application on the basis of two borrowers and losing one of those means the lender has fewer options if the mortgage goes bad.
In most circumstances, a lender will refuse just to strike out a borrower’s name. Instead, the remaining party must refinance the home in his or her own name. And lenders will then approve or decline the application based on the single borrower’s creditworthiness and financial circumstances.
If you have a VA or FHA loan, you may be able to do this using those organizations’ streamline refinancing offerings.
6. Your circumstances have changed
Perhaps you’d been through a financially difficult period when you got your current mortgage. Maybe your credit score was only fair and you had high borrowings and small savings. You could only get approved for a less desirable type of mortgage with a higher interest rate.
But now your credit score is looking much better, you’ve paid down some debt and your savings are worthwhile. So if your existing mortgage is penalizing you for who you were, rather than rewarding you for who you are now, it might be time to refinance. A lender will review your circumstances with fresh eyes and potentially offer you a lower interest rate that can help you save money.Ready to shop for your dream home? Start here.
What to consider before refinancing
Nowadays, almost no mortgages come with prepayment penalties but some older ones may. Check your loan agreement or ask your lender about them.
Prepayment penalties are “fines” you have to pay for paying down your mortgage early, which you’ll do if you refinance. If you’re unlucky enough to be liable for them, it will change your cost-benefit analysis.
Cost vs Benefit: Should I refinance?
Obviously, you need to be sure you can afford the costs of refinancing and those can add up.
But it’s also a good idea to work out whether the benefits of a new mortgage are worth the costs. You’ll find refinance calculators online that can help with this. But the arithmetic is fairly simple:
- Deduct your new monthly payment from your existing one.
- The difference is your monthly savings.
- Divide your refinance fees and closing costs by your monthly savings.
- That will tell you how many months it will take you to recoup the cost of your refinance.
That’s a break-even calculation. It helps you understand how long it will take for the savings of your refinance to cover the costs.
There’s no right or wrong answer for what constitutes a good break-even period. That’s entirely up to you to decide, based on your personal financial situation. But if it’s several years distant, you may want to think carefully and take some advice before pushing the button on your home refinance.
Is this your forever home?
Whether or not you plan to move in the next few years can have a big impact on your decision to refinance a mortgage. If your current one is your forever home, then all the savings you make after your break-even point are yours to bank.
But suppose you’ll be moving anyway in a few years. Then you’ll pocket those savings only for the period between your break-even point and your sale date. And, if that’s not very long, the whole thing may not be worth the hassle.
How soon can you refinance a conventional loan?
Conventional loans are ones not backed by the government. So FHA, VA and USDA loans are not conventional. But loans from private lenders or Fannie Mae or Freddie Mac are.
Conventional loans have few rules about refinancing. Technically, you can walk out of closing one refinance, drive home and go straight online to apply for a new one.
The exception to this is if you’ve done a cash-out refinance. After one of those, there is a six-month waiting period before you can apply again. In mortgage industry jargon, such a waiting time is called a “seasoning period.”
How soon can you refinance an FHA loan?
FHA loans are backed by the federal government and they have more rules concerning refinances.
You can’t get a cash-out refinance until you’ve been in the home (and occupied it as your principal residence) for at least a year.
But if you want a lower mortgage rate or monthly payment without a cash out, then you only have to wait seven months between refinancings. That applies whether you want a normal refinance or a streamline one.
How soon can you refinance a VA loan?
VA loans are backed by the federal government in the form of the Department of Veterans Affairs. These loans provide unique privileges.
But they still have rules about refinancing: You have to have had your current loan for seven months before you can refinance or re-refinance. And the VA’s streamline option is almost always the one to go for unless you want to take cash out.
How soon can you refinance a USDA loan?
If you have a USDA loan that’s backed by the federal government, you’ll have to wait 12 months before you can refinance.
But, more rarely, the USDA offers direct loans. That means it’s lending you its own (or taxpayers’) money rather than just guaranteeing a private lender’s loan. If you have one of those, there are no formal rules governing seasoning periods for refinances.
Refinancing jumbo loans
For most purposes, jumbo loans are a type of conventional loan so there are no fixed rules about waiting times for non-cash-out refinances.
Indeed, it may be possible to refinance immediately even after a cash-out transaction. But that will be up to lenders. They’ll notice the recent refinance when you shop around for your new loan. And some may be more laid back about it than others.Speak with a mortgage specialist today.