When is the Best Time to Refinance Your Mortgage?

When it comes to determining the best time to refinance your home loan, it is important to remember that what works for someone else may not be the right option for you. There are various factors to consider, from your personal financial goals to current market interest rates. Everyone’s situation and needs are unique, so it is important to do your research. The good news, is you have come to the right place to get started!

How soon can you refinance a home loan?

In order to start the refinancing process, you must first establish that your mortgage is eligible. Regardless of the type of home loan you possess, you must meet its seasoning requirements (the amount of time you have had the home loan).

The length of time you have to wait to refinance will depend on the type of mortgage you currently have and the type of refinance you are interested in, but here is a quick overview.

Conventional loans: Some lenders may offer the option to refinance immediately, but in most cases, you will have to wait at least six months or until you have made six consecutive payments.

FHA loans: You must own the home and make on-time mortgage payments for at least six months before you are eligible.

VA loans: The VA requires you to wait at least 210 days or make six consecutive payments before you can refinance.

It is important to note some lenders may have additional requirements for refinancing your mortgage. It is also possible to incur potential prepayment penalties for paying off your loan too early, so be sure to check with your lender to discuss your refinance timeline.

When should you refinance?

There are a number of different situations in which it is worth it to consider refinancing your home loan. For one, if home loan interest rates decrease, you may hear in the news, “Mortgage rates are falling, time to refinance.” While this is a great reason to consider refinancing, there are other instances where it might be equally compelling for you, including:

• Eliminating mortgage insurance. If you placed less than 20% down on your home and do not have a VA loan, you likely carry some type of mortgage insurance. In general, you can reduce private mortgage insurance (PMI) once the equity in your home exceeds 20%. However, FHA mortgage insurance premiums (MIP) may be required for the duration of your loan. If the equity in your home exceeds 20%, you may want to review interest rates to see if a refinance will allow you to eliminate your mortgage insurance.

• Paying off your mortgage more quickly. If rates have dropped enough from your current mortgage, or if you have more monthly income, you may be able to consider reducing the overall term (length) of your mortgage. This can save you thousands of dollars in interest over time. Imagine only having to pay your mortgage for 15 years rather than 30.

• Consolidating debt or getting cash. If you have credit cards with high interest rates, student loans, or need cash, you may be able to tap into the equity of your home with a refinance.

• Changing your loan type. It might make sense to refinance to change the type of loan you have. A good example would be to change from an adjustable-rate mortgage (ARM) to a lower fixed-rate mortgage that stays constant over the life of the loan. This can give you a sense of security because you will know what your long-term housing expenses will be and will not have to worry about changing interest rates.

What are the costs of refinancing?

Another important factor to consider before jumping into the refinancing process is the potential costs. From prepaid items to closing and lender fees, even the simplest refinance will have a few up-front costs. Here are some of the costs you may incur during a refinance:

• Origination fees

• Appraisal fees 

• Title fees—you will need to document the title of the property

• Attorney fees 

• Recording fees

• Points—you can pay mortgage points just like during a purchase, in which one point represents 1% of the loan amount

Also, depending on the rate difference between your current and new loan, and the cost to refinance, it may take several months to break even. You need to consider how much longer you intend to be in your home. If you are planning on moving in a year or two, refinancing your current mortgage might not make financial sense.

When should you NOT refinance?

Generally, if you are not able to obtain a rate that is at least 1% lower than what you currently have, it may be better to hold off on refinancing as it will take longer to break even on the up-front costs.

Here are some other instances in which you may not want to refinance your mortgage:

• If it will increase your rate

• If you are more than halfway through your loan’s term

• If you plan on moving in the next few years

• If the overall costs to refinance are unaffordable

Ultimately, the goal of refinancing your mortgage is to save you money in the long run, tap into home’s equity, or pay off your home loan sooner. If refinancing will hinder your finances rather than benefit them, you may want to reconsider.

Do you lose equity if you refinance?

While refinancing will not normally affect your home’s equity, there are some cases in which it can. Remember, equity is based on the total balance you still owe on your mortgage and the home’s market value. That means, if your refinance increases your mortgage balance, it may decrease your equity. However, refinancing does not change or have any true effect on your home’s worth.

For example, a cash-out refinance will impact your equity since you are withdrawing funds from it using a larger loan to obtain a cash surplus, whereas a rate-and-term refinance that reduces your term from 30 years to 15 years can help you build up your equity faster (though it will not affect it in the short term).

When is the best time to refinance?

Though you may notice that market conditions can cause an influx of refinances, there is not one time that makes sense for everyone. It truly depends on your personal circumstances and financial goals. The best time for you may be when no one else is talking about it.

Refinancing is a personal choice and the question, “When is the best time to refinance?” rarely has a clear answer. However, taking the time to educate yourself and consult with your lender will go a long way in giving you the confidence to come to the best decision for your needs.