Buying a home is the biggest and most expensive purchase for most people. This purchase comes with the decision of choosing an appropriate mortgage plan and the associated interest rate. Homeowners want the best terms for their mortgage and therefore they keep looking out for opportunities to refinance their mortgage.
How soon can I refinance my mortgage loan after purchasing a home? If the interest rates go down, how long do I have to wait to benefit from the opportunity? These are some questions that every homeowner start thinking about the minute they sign their mortgage contract.
What does refinancing a mortgage really mean?
Refinancing a mortgage means paying off your existing mortgage and replacing it with a new one. The reason most people want to refinance their mortgage is mainly to obtain a lower interest rate, to shift to an adjustable rate mortgage (ARM) from a fixed-rate mortgage and to shorten the term of their mortgage or vice versa.
Since mortgage rates keep getting lower and lower every year, it makes sense that people would want to refinance their mortgage to get a lower interest rate. However along with paying the complete original mortgage, refinancing can cost between 3% and 6% of the loan’s principal. It also requires an appraisal, application fees and title search. All of these costs together can sum up to a huge amount than you might have expected initially. Therefore, it’s important for homeowners to realize if and when should they refinance their mortgage.
Unlike the common propositions, financial advisors have different guidelines when it comes to how soon you should refinance your mortgage after purchasing a home. If we talk about mortgage lenders, some of them will refinance your mortgage immediately while others will make you wait for some time. Generally, lenders base this decision on the amount of equity you have in your home rather than on how long you have owned the home.
Things to Consider before Refinancing
Here are some factors that affect how soon can you refinance your mortgage. You might want to consider these before making a decision.
When you refinance your mortgage, you do so on the basis of the equity you have accumulated. Equity is calculated by subtracting the amount owed from the value of the home. With each monthly mortgage payment, your equity grows.
Mortgage lenders generally don’t allow a cash-out refinance loan unless you have owned your home long enough to have collected enough equity to cover the loan. Although most of the mortgage lenders will not make you wait for a defined period of time to apply for a refinance application, however, you will still have to reappraise your home. A lender usually requires 5% – 10% home equity if you are refinancing to get a lower interest rate or opting for a different mortgage term.
However, if you are applying for a cash-out refinance loan, your mortgage lender will demand a higher equity.
Apart from paying the total purchase amount, the closing costs can really add up a hefty amount to your total payable sum. Generally closing costs average 2% to 5% of the refinance value. You may also have to pay a higher interest rate if you recently bought your home or want to refinance a short-term mortgage loan.
In case you are dealing with the same lender for refinancing, you may get certain fees waived. But take your time to think things through, collect and estimate your payable amount in both the cases (original mortgage and refinance) and analyze all the pros and cons of refinancing to find out if it’s worth it at this time or not.
If your mortgage contract includes a prepayment clause then it is most probable that refinancing your mortgage will not save you much money. Apart from paying the penalty fees, you will also have to pay for other costs as well that are associated with an application for a new loan.
If you want to apply for a refinance, try to make your credit score as good as possible. A good credit score will surely increases your chance of getting approved for a refinance even with an average equity value.
Risks for Lender
Mortgage lenders usually want you to wait for at least 6 months or more after purchasing your home to apply for a refinance, it allows them an opportunity to judge whether they can trust you with a refinance or not.
If your appraisal shows that the value of your home is greater than the amount you want to borrow from the lender, your chances of getting approved from the lender for a refinance gets higher. But if that is not the case, your lender will probably make you wait so that your equity can grow up a bit.
There are a lot of reasons and benefits for refinancing your mortgage but figuring out the right reasons for making the decision is important. This requires a sound knowledge of current market conditions, your financial situation and your future plans.
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