Many loan programs allow you to refinance after just six months of purchasing the home. Just because you can refinance, doesn’t mean you should though.
There are certain factors you should consider before you refinance your loan.
What are the Closing Costs?
Perhaps the largest factor to consider is the closing costs. You likely already paid closing costs when you bought the home. If you refinance, you will pay them all over again. Is it worth it? Remember, closing costs can be anywhere between 3% and 5% of your loan amount. If you use the same lender, you may be able to cut the costs down slightly, but there are still plenty of costs that really add up.
Think about the reasons you are refinancing. Did you take a higher interest rate because you had blemished credit or a high LTV? Maybe you rectified either or both of those situations and think you could score a lower interest rate. You should do some calculations before you decide on this because sometimes that lower interest rate doesn’t pay off if you pay too many fees.
Take your total closing costs and divide them by the monthly savings you’ll gain with the new interest rate. This number is your break-even point or the time when you start earning the savings rather than paying off your closing costs. If your break-even point is 3 years or longer, it’s typically not worth refinancing.
What’s Your Goal?
Are you trying to cut your term down? Maybe you had a windfall and are able to pay a big chunk of your loan down. If that’s the case, you may want to refinance into a shorter term to cut the amount of interest you pay over the life of the loan down. This could work in some situations. But if your loan doesn’t have a prepayment penalty you can even keep your current loan and just make larger payments. This allows you to save on the closing costs and still cut down the interest you pay on the loan.
If the interest rate on the lower term loan is significantly lower, though, you may find that it’s worth it to refinance. Just check with your lender first to make sure they don’t have any requirements regarding how long you must wait to refinance.
FHA and VA Loans
The only loans that have written guidelines regarding how long you must wait to refinance are FHA and VA loans. If you plan to use their streamline refinance program, you must make at least six payments before you can refinance.
This is the case for cash-out loans too. In fact, it works in your favor to wait until the loan is at least 12 months old. If you try to take cash out of the home’s equity before 12 months is up, the lender will use the purchase price for the home’s value rather than the current appraised value. This could cut down on the amount of equity you have and therefore the amount of cash you have in hand.
Just how long you must wait to refinance really depends on the situation. In general, don’t expect to be able to refinance any sooner than 6 months after buying the home. As always, make sure you shop around and know the terms of the loan before you refinance.