When Should you Refinance your Mortgage?

Mortgage rates have steadily declined in the months since closing on your home. Isn’t that how it goes? It can be frustrating, but don’t worry – the rate you have isn’t set in stone. But how soon after buying a house can you refinance? Is it worth it to refinance? How often can you refinance? These are great questions worth exploring as you decide what makes sense for you.

First: What happens when you refinance your home?

A refinance simply means you’re replacing your current mortgage with a new one. Though there are different types of mortgage refinances, the process for most is similar to when you got your original home loan:

• You submit a loan application
• Your lender reviews your current finances and payment history
• Upon approval, you receive a new loan with a payment schedule based on the approved interest rate and term (and sometimes cash)

How soon can you refinance a mortgage after purchase?

There are some mortgage refinancing rules that affect that answer. It depends on your:

• Current mortgage terms
• Desired type of refinance

Typically, there is no waiting period on a rate-and-term refinance for a conventional mortgage. But when can you refinance an FHA loan? And how soon can you refinance a VA loan? Here are some common scenarios:

Is refinancing for 1% worth it?

Now, let’s say it’s been six months since you closed on your mortgage and rates have dropped nearly one percent. Is a refi worth it? A traditional mortgage rule of thumb is to refinance only if you can lock in an interest rate that’s at least a full point below your current rate. That’s a helpful guide, but take the advice with a grain of salt. There are times when refinancing for less than a full point can make sense and others when it’s not wise even for a full percent decrease.

Consider refinance costs

A big consideration is whether the savings outweigh the costs of refinancing. One of the disadvantages of refinancing your home loan so quickly is that those closing costs – including appraisal fees, title fees, attorney fees, and lender fees – will likely have to be paid again for the new mortgage.

Think about your term

The term (length) of a mortgage is often another important consideration. When you refinance, you reset your term to the specifications of the new loan. If you’re refinancing from a 30-year term to another 30 years, it will take longer than originally planned to pay off your loan – adding interest payments along the way. While a shorter term can help you squeeze more savings out of a refi, this is less of a concern if you’re under a year into your mortgage. Great news for you!

Run the numbers

A robust refinance calculator can help you run potential scenarios. Plug in the details of your current loan and compare it to a potential refi. Here’s what it could look like refinancing a $500,000 loan for a one percent reduction after six months and $10,000 in closing costs:

Although it would take six more months to pay off the loan, the lower interest rate helps you save nearly $350 each month and over $100,000 over the life of the loan. It would take 29 months for the savings to outweigh the $10,000 in closing costs.

How often can you refinance a home?

The short answer: As often as it makes sense and your lender will allow. There are no official limits on how many times you can refinance a house, but that doesn’t mean it’s always wise (or that your lender will always approve an application). Requirements must be met and sometimes there are special criteria based on the type of refinance.

Is it worth refinancing?

Generally, refinancing is a safe bet if rates drop by a percent and you plan to stay in your home for at least the next few years. Here are some other guidelines to help decide if now is a good time to refinance:

• You can afford the upfront costs of a new mortgage
• You calculated your time to break even and don’t plan to sell your home before you can reap the savings
• You’re refinancing into a shorter term and know you’ll pay less interest over the life of the loan
• You can eliminate mortgage insurance in the process

New to refinancing? Download our free eBook: Ready, Set, Refi!