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How Soon Can A Mortgage Be Refinanced After You Buy?

The UpEquity Team Aug 24, 2021
How Soon Can A Mortgage Be Refinanced After You Buy

Refinancing is viewed as a smart financial move if it results in a drop in your monthly payments, reduction in the loan duration or a spike in your home equity. But here’s the point in question: How soon can a mortgage be refinanced after you buy?

Well, the answer depends on your mortgage type and the type of refinancing you want. Some mortgage types include:

  • Conventional mortgage
  • Government-backed loan
  • Jumbo loan
  • Interest-only mortgage

Typically, these mortgages can either be fixed-rate or variable-rate mortgages.

What is Mortgage Refinancing?

Refinancing is taking out a new mortgage with new terms to replace the current mortgage.

Refinancing can be a good financial move if it leads to financial savings and better loan terms. Some of the reasons for refinancing include to:

  1. Take advantage of lower interest rates
  2. Repay the mortgage within a shorter period
  3. Change from an adjustable rate to a fixed-rate mortgage
  4. Obtain cash by tapping into home equity
  5. Get rid of mortgage insurance and reduce monthly costs

So...how soon can you refinance a mortgage after you buy a house? Let’s find out.

How Soon Can I Refinance a Mortgage?

For conventional mortgages, you might be able to refinance as soon as you close on a new house or after a previous refinancing. However, this move is only possible if you’re not taking cash out. Some lenders allow a six-month seasoning period before refinancing with them.

If the purpose of refinancing is to get cash out or to get rid of mortgage insurance, you have to wait until you have gained at least 20% in home equity.

However, if you have less than 20% in home equity, you may still be able to refinance if you have a high credit score. In this case, you would be charged a higher interest rate and be obligated to take mortgage insurance.

With 20% home equity, you can refinance your FHA mortgage into a conventional mortgage, which will not have mortgage insurance conditions.

Now, refinancing a mortgage may not be a good idea under these three circumstances:

  1. When you’re about to complete your mortgage repayment
  2. When your mortgage has a prepayment penalty
  3. When you’re planning to move out of your house within the next few years

What’s The Cost of Refinancing?

Since refinancing involves taking out a new loan, you will follow the same process as you did when applying for the first mortgage. This means you will have to:

  • Pay closing costs ranging between 2–5% of the mortgage value
  • Schedule a home appraisal
  • Undergo a home inspection

The refinancing cost is only paid in the short term. In the long term, benefits may come in the form of reduced interest.

To determine the financial value of refinancing, it’s important to calculate the break-even point to understand when the refinancing cost will be recovered. Supposing you intend to re-sell your house within a short time, you may not reach this break-even point. For example, if the cost of refinancing is $5,000 and your interest savings is $200 per month, you will only save $4,800 within two years. In this setting, the benefits from refinancing will be realized in the third year. Therefore, if you’re moving out soon, there’d be no need to refinance.

Is Refinancing Worth It?

You can refinance a conventional mortgage immediately after closing if:

  • It’s within your lender’s policies
  • You want to take advantage of lower interest rates

You have to wait until you have 20% in home equity if:

  • You want cash-out refinancing (and your credit score is lower)
  • You want to eliminate mortgage insurance

Refinancing is worth it if it leads to long-term savings and better loan interest terms. This means the timing has to be right. So, be sure to check if you qualify and compute the costs involved if you want to come out ahead.