Refinancing your mortgage could make financial sense for many reasons. A lower interest rate or modified loan term could mean more breathing room in your budget, or you could repay your loan sooner. There’s also the ability to tap into your home equity with a cash-out refinance. But is there a waiting period before you can move forward?
This guide explores the mortgage refinancing process and waiting periods by loan type. It also outlines the pros and cons of early refinancing to help you make an informed decision.
Why Do People Refinance a Mortgage?
Refinancing involves replacing your current home loan with a new one. Here are some of the most common reasons why homeowners choose to refinance:
- Lower interest rate: If rates are lower or your credit score has improved since taking out your home loan, you may qualify for a lower interest rate. A lower rate can translate into significant cost savings over the loan term. Depending on the decrease, it could also mean more affordable monthly mortgage payments.
- Change loan term: Refinancing could allow you to switch from a 30-year to a 20-year or 15-year mortgage. You’ll likely get a higher monthly payment, but could tremendously lower your interest costs.
- Predictability: Refinancing allows you to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Doing so gives you predictable monthly mortgage payments that are easier to work into your budget.
- Access cash: A cash-out refinance lets you convert your home equity into cash. You can use the funds however you see fit, whether you want to consolidate high-interest debt, cover home renovation costs or fund another big-ticket purchase.
Understanding the Timing of Refinancing
Before applying for a refinance, ensure the timing makes sense for your financial situation.
The Process of Mortgage Refinancing
As previously mentioned, refinancing involves swapping out your current loan with a new one – preferably with more competitive terms – to pay your loan off sooner or access cash.
To get started, you’ll need to gather financial documents and get preapproved with the lenders on your shortlist. The next step is to compare loan offers to decide which is best and formally apply.
Be prepared for a credit check and home appraisal to determine your eligibility for a refinance and at what rate. Once the underwriting process is complete, the lender will provide a clearance to close on the new loan. You can head to the closing table, sign the closing documents and seal the deal.
Ideal Times to Consider Refinancing
It depends on your financial situation and goals. That said, clear financial benefits should drive your decision to refinance.
Ideally, you want to refinance when rates have dropped significantly below your current rate. It’s also worth considering your primary objective – is it to reduce your monthly mortgage payments, pay off your home loan faster or switch to a fixed-rate mortgage?
Each of these objectives has its perks, but there are also downsides to consider. A lower rate or extended term could help in the affordability category, but you could incur even more borrowing costs with the latter. Expect steep housing costs if you want to reach the finish line sooner.
Ultimately, you should evaluate the benefits and costs to decide whether it’s a good time to refinance.
Are There Conditions That Must Be Met Before Refinancing a Mortgage?
Each lender has its own set of refinancing guidelines. That said, here are some general conditions to be aware of before applying:
Home Equity
Your home equity is the percentage of your property you own outright. It is calculated by subtracting your outstanding mortgage balance from your property value. So, if your home is worth $425,000 and you owe $125,000 on your home loan, you have $300,000 in home equity.
Most lenders require you to have at least 20% equity in your home to qualify for a rate-and-term refinance. The equity requirement may be higher if you’re aiming for a cash-out refinance.
Credit Score
Your credit score is another key factor lenders evaluate when considering you for a refinance. Lenders reserve the most competitive rates for borrowers with solid credit scores, as the risk of default is lower.
A minimum credit score of 620 or higher is recommended for a conventional loan refinance. If your score is lower, refinancing with a government-backed FHA, USDA, or VA loan could be more ideal, as some allow credit scores as low as 580.
Income Requirement
Lenders want reassurance that you have the means to make timely monthly mortgage payments. So, your income should be both consistent and verifiable.
Your debt-to-income (DTI) ratio – your monthly debt payments divided by your monthly gross income – is also a factor. It should not exceed 43% to have the best shot at getting approved for a refinance.
Repayment History
A history of on-time monthly debt payments can work in your favor and earn you a nod of approval. However, late or missed payments might raise concerns for lenders, resulting in less favorable terms or a denial.
How Soon Can You Refinance a Mortgage?
The waiting period between taking out a mortgage and being eligible for a refinance varies by loan program. Some home loans qualify for refinancing right away, while others require waiting a bit before proceeding.
Rules and Guidelines Per Loan Type
Below are the specific waiting period guidelines for mortgage products.
Conventional Loan
You can do a rate-and-term conventional loan refinance immediately, as there is no mandatory waiting period.
Conventional Cash-out Refinance
The rules are slightly different for conventional cash-out refinances. You’ll need to wait six months before proceeding.
FHA Loan
It varies by the type of FHA loan refinance you’re considering. Here are the rules:
- FHA rate-and-term refinance: 210 days of ownership and six on-time payments
- FHA streamline refinance: 210 days of ownership and six on-time payments
- FHA cash-out refinance: six months and timely payments for that same period (no waiting period if you own the home outright)
VA Loan
For veterans and service members opting for a VA loan refinance, the guidelines permit a streamline refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL), after a waiting period of 210 days from the closing date of the mortgage or after six monthly payments are made. The same rule applies to VA cash-out refinances.
USDA Loan
If you have a USDA loan, you’re eligible to refinance only after 12 months from the closing date of your original loan. USDA refinances are designed to provide a lower interest rate or a reduced loan term – cash-out refinances are not an option.
Jumbo Loan
Jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Due to the sizable loan amounts, the refinancing rules for jumbo loans are more stringent and vary by lender. Expect higher minimum credit scores and home equity thresholds.
What Is the Effect If You Refinance Your Mortgage Too Soon?
Refinancing your mortgage is a strategic financial move that can yield considerable financial benefits. However, refinancing too soon could have serious negative consequences. Here is a closer look at the potential impacts:
- Waiting period: Refinancing too soon may conflict with the lender’s waiting period, which could result in penalties or additional requirements.
- Closing costs: They are between 2% and 5% of the new loan amount and include application, origination and appraisal fees. Refinancing prematurely may not allow enough time to offset these costs with interest savings.
- Amortization schedule restart: Most of your monthly mortgage payment is allocated to interest at the beginning of the loan term. Refinancing too early can extend the period of high-interest payments, potentially increasing the total interest paid over the life of the loan.
Potential Benefits of Early Refinancing
When you decide to refinance your mortgage early, you may unlock a range of potential benefits, including:
- A more affordable monthly mortgage payment if you get a lower interest rate or extended loan term
- A shorter loan term, which means a higher monthly mortgage payment but the ability to pay off your home faster and save interest over time
- Access to your home equity to consolidate debt, improve the value of your home, make a big-ticket purchase or meet other financial goals
Possible Drawbacks of Early Refinancing
As with any debt product, there are also downsides to consider, like:
- Closing costs, which can include appraisal fees, title insurance and processing fees
- The mandatory waiting period may be inconvenient depending on your timeline for meeting your objectives
- Increased borrowing costs if you reset your mortgage term or extend it beyond the original term
- Reduction in equity, particularly if you opt for a cash-out refinance
Conclusion: Knowing How Soon You Can Refinance a Mortgage
It’s possible to refinance soon after closing your mortgage, but some loan programs have a waiting period. Although it may seem like a significant convenience, a waiting period gives your home more time to appreciate, which in turn helps boost your equity.
Before applying for a refinance, familiarize yourself with the guidelines for the type of mortgage you’re seeking to ensure you qualify. If not, devise a plan of action to ensure you meet the eligibility requirements sooner rather than later.
Pay attention to market trends and conduct a cost-benefit analysis to gauge whether a refinance in the near future makes sense for you. Before moving forward, it’s also ideal to consult with a mortgage professional to discuss the specifics of your situation and your goals for refinancing.
Your proactive approach to understanding the timing for refinancing can lead to significant cost savings and position you to meet your financial goals.
