If you are obsessed with getting the lowest interest rate on your mortgage, you may find yourself wanting to refinance shortly after buying the home. Is it allowed? Can you do it?
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Technically, you can refinance right after buying the home. Is it the smart thing to do though? It probably isn’t the best idea. In fact, some loan programs have a specific amount of time you must wait to refinance or the lender just wants to see how you handle your current loan before they allow you to refinance.
So how long should you wait to refinance?
FHA Streamline Refinance
If you have a current FHA loan and want to refinance it with the streamline program to get a lower rate, you’ll have to wait at least 210 days. You’ll also have to prove that you made at least six mortgage payments in that time. Some lenders go as far as making you wait 12 months so that they can see your mortgage history. They want to know that you paid your loan on time for 12 months before they write you another loan and let you pay closing costs again.
Other Loans and Refinancing
Most other loans require you to wait at least 12 months before you refinance. It’s not a rule set in stone, but it’s one that many lenders require. Waiting until your homeownership is seasoned at least 12 months can tell a lender a lot about you.
If you made all of your mortgage payments on time, it lets future lenders know that you should be able to afford the new mortgage payment, especially if it is lower than the original payment. This also gives you time to get settled in your home before you have to pay closing costs all over again. Closing costs can be as much as 2% – 5% of your loan amount. That’s a lot of money to cough up shortly after buying your home.
Understanding Your Break-Even Point
Before you refinance, you should determine your break-even point. This is the point that you pay off your closing costs and start reaping the savings of the refinance. If the break-even point is too far in the future, the refinance may not make sense.
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This can help guide you to determine if refinancing is right for you. We know that even just a 0.5% lower interest rate can sound enticing, but it’s not always worth it.
All that you need to figure out your break-even point is the total of your closing costs and the amount you’ll save on your monthly payment. Let’s say your closing costs were $3,000 and you would save $50 per month. Your break-even point would be:
$3,000/$50 = 60 months
This means it would take five years before you would start earning the savings of the refinance. Does this help you put it into perspective? Even though you’ll save $50 a month and that seems good, it’s not as good as you think. Will you even be living in the home in five years? Is it better to wait until rates get lower and you can save more money? This is something you may want to consider.
Do You Have Equity?
Another factor to consider is the amount of equity you have in the home. If you used an FHA, VA, or USDA loan, you probably have little to no equity right off the bat. Even with a conventional loan, you can get by with putting just 5% down. If you refinance too soon, you’ll still be at that same amount of equity, which may not work in your favor.
Lenders offer what’s called risk-based pricing. This means they quote you an interest rate based on your risk of default. A high LTV often creates a high risk of default. Lenders like to know that you have more invested in the home before they will refinance it for you. They want to know that you intend to stay in the home and will do what you can to make your mortgage payments on time.
Refinancing your home after you buy it can be done at almost any time unless you want to use the FHA streamline program. This doesn’t mean that it’s the right choice, though. Look at the big picture to determine if refinancing in less than 12 months after you bought the home makes sense.