Refinancing a loan is a process in which you replace your existing loan with a new loan. The new loan is considered a completely different entity with a new interest rate and different terms and conditions. Borrowers choose to refinance their home loan to lower their interest rate and get more favorable terms.
With interest rates at near-record lows, new homeowners find themselves asking â€˜How soon can I refinance a loan after closing?’ The answer is, it depends on the type of mortgage you have. It’s possible to refinance some types of mortgages immediately after closing. However, other types may have a waiting period of several months. It could be up to 24 months in some cases.
Time-Lines For Different Types Of Home Loans
Conventional refinance – A conventional refinance is when you exchange your conventional mortgage with a new home loan directly. However, you may have to shop around for a different lender to refinance a newly closed loan. Most lenders set waiting periods of anywhere between 6 months and 24 months before you can refinance with them. Few lenders charge a prepayment penalty fee for early refinancing. Make sure your current mortgage doesn’t have a prepayment penalty clause before going ahead with refinancing.
Cash-out refinance – A cash-out refinance allows you to use the equity in your home to take out a larger loan. Equity is the difference between the current worth of your home and how much you owe on your existing mortgage. In this case, the lender gives you a higher loan amount than what you owe and you pocket the extra cash. This can be used for any purpose, from funding college education to doing home repairs. Most lenders will require you to wait at least 6 months after closing on your original mortgage before refinancing.
FHA streamline refinance – An FHA (Federal Housing Administration) refinance lets you refinance your current FHA home loan to get a lower interest or potentially lower your monthly payments. You must own your home for a minimum of 210 days before you’re eligible to apply for a streamline refinance through the Federal Housing Administration. If you want to refinance sooner, you may be able to do so through a traditional lender. Only existing FHA mortgages qualify for an FHA streamline refinance.
USDA loan refinance – USDA loans can be refinanced only after you’ve made on-time payments for at least 12 consecutive months. You won’t need to undergo a new appraisal or credit check for refinancing a USDA loan. However, these loans don’t offer a cash-out refinance facility.
VA loan refinance – When refinancing a VA loan, you have two options – a streamline or conventional refinance option and a cash-out refinance option. Both have the same refinancing time-line of at least 6 months from the due date of your first monthly payment. Some lenders may want to see 12 months of on-time payments before approving a VA loan refinance.
Reasons To Refinance A Loan Soon After Closing
Closing on a mortgage is time-consuming, expensive, and stressful. It’s not a process you want to go through several times and definitely not immediately after closing the original loan. On the other hand, there are several reasons why you may want to consider refinancing sooner rather than later.
Some reasons why you may want to refinance a loan soon after closing:
· To get a lower rate of interest – This can happen under two circumstances. If mortgage refinance rates have dropped across the board, you’ll pay a lower interest rate on your new loan. You may also qualify for a lower interest rate if your credit score has improved since your original mortgage.
· To lower your monthly payments – If you can’t afford your current monthly payments, you’re at risk of defaulting on your loan. This can impact your credit score adversely and also increase the cost of the loan. Refinancing to lower your monthly payments will make them more affordable and reduce the risks associated with missed payments.
· Switch from adjustable to fixed rate – With an adjustable-rate mortgage, your interest rate and monthly payments fluctuate several times over the loan term. Switching over to a fixed rate when market rates are low allows you to lock a low interest rate. This could save you a substantial sum in interest.
· Get rid of private home loan insurance – If your down payment was less than 20% on a conventional mortgage, you may be paying private mortgage insurance. This can add to the cost of your loan. If the market value of your home has increased considerably you’re in luck. If you refinance at the new market value you may be able to eliminate the private mortgage insurance.
Reasons Not To Refinance A Loan Soon After Closing
Refinancing is not always a good idea. Even if you qualify for refinancing, there are a couple of things to consider before you go ahead.
Check whether your loan has a prepayment penalty. Some lenders charge this fee for paying off a home loan early. If your mortgage has a high prepayment penalty, you’ll need to calculate whether refinancing early is worth it.
Another thing to consider is the closing costs. The average cost to refinance a loan is about $5,000. This can make a huge dent into your savings. Use a refinance calculator and calculate your potential break-even point and savings to determine whether or not this is the best move for you.
If you do consider refinancing a loan soon after closing, it’s important to spend some time researching lenders, comparing interest rates and closing costs. This will help you maximize your savings when your refinance