There are many advantages to refinancing your home. Depending on your circumstances, it could be an opportunity to lower your monthly payment, pay off your home faster with a shorter loan term, or take cash out of your home equity to finance a major project.
The good news is that there are no limits to how often homeowners can refinance their property! Therefore, it is not uncommon for owners to refinance their property several times throughout the life of the loan. For example, they may refinance to remove their private mortgage insurance (PMI) a few years after purchasing a property or switch to a lower interest rate to reduce their monthly payments. They may also do a cash-out refinance and use the equity they built in the house to buy a vacation home.
Refinancing involves taking a new loan using the property as collateral with different terms (such as a different type of loan, interest rate, mortgage provider, etc.) and using the fund to pay off the previous mortgage. If the homeowners have enough equity built into the property, they can fund other projects via refinancing, such as a house renovation.
Since refinancing is a mortgage, it is subject to similar rules to primary home loans, including credit score requirements, income, closing costs, and so on. Besides, lenders typically have mortgage refinance requirements you need to meet each time you apply.
Here are some things to consider if you are planning to refinance your property, as well as some common questions homeowners have regarding refinancing their homes.
How Soon Can I Refinance My Home?
Have you just bought a house? It is not uncommon for homeowners to want to change their loan terms after closing on a home. Home hunters are encouraged to do their due diligence and shop around to find the best mortgage rate and lender. However, things may not always work out as planned. For instance, the interest rates may drop significantly enough that refinancing would save you thousands of dollars over the life of the loan.
Some mortgages – especially if you are planning on using the same loan provider for refinancing – have a waiting period known as the “seasoning period,” commonly six months to a year. Therefore, it is best to check the tiny writing at the bottom of your loan agreement before making any decision. You could also get around the seasoning period using a different mortgage lender when refinancing.
Home loans may have different waiting requirements depending on the mortgage type. Here is what to expect based on your primary loan.
As long as you are not doing a cash-out refinance and your mortgage lender does not have a seasoning period, you can refinance your conventional loan soon after closing the home or refinancing. In other words, if you are unsatisfied with your current lender or if the interest rates drop, it is never too late to find better options elsewhere. However, in some rare cases, your mortgage lender may have a prepayment penalty fee that you will need to include before moving forward with your refinancing plans. Therefore, it is best to shop for the best rate and check your mortgage agreement prior to closing.
Conventional cash-out refinancing has different rules than traditional loans. These loans allow homeowners to replace their existing home loan with a new, larger mortgage, with the difference being disbursed to you as cash-back at closing. It can be an excellent way for homeowners to obtain large sums of money – up to 80% of the value of their home – for rates significantly lower than those offered by credit cards or consumer loans. However, mortgage lenders tend to have more stringent requirements for cash-out refinancing.
Most mortgage lenders require the homeowners to maintain at least 20% equity in the home for a cash-out refinance loan. So, your equity must increase enough between refinancing – either because the property value has increased significantly or you paid off a large share of your mortgage. Besides, most lenders have a six-month waiting period between cash-out refinancing.
Government-backed loans, such as FHA, USDA, or VA loans, typically offer desirable rates and lower requirements for homebuyers. However, they also have more stringent rules than conventional mortgages. Your government-backed loan may be part of the Streamline refinancing program, such as the FHA Streamline Refinance or VA IRRRL program, which facilitates refinancing by reducing the time and paperwork associated with a refi. However, government-backed loans refinancing typically have waiting requirements: up to 210 days for a VA or FHA Streamline refinancing and between 6 to 12 months for a USDA refinancing.
Things to Consider When Refinancing
Although refinancing several times has its advantages, it also comes with some conditions and requirements. Before calling your mortgage lender, you will need to weigh the pros and cons. Here are some of the elements to consider before refinancing.
Refinancing involves taking out a new loan, and, just like your primary mortgage, it does not come for free. You will most likely need to pay some closing costs, such as:
- Application fee
- Appraisal fee
- Inspection fee
- Attorney fees (if applicable in your state)
- Title fee (if refinancing with a new lender)
The closing fees may vary depending on your state and the type of loan you are applying for, but they typically represent the equivalent of 2% to 3% of your loan amount. Therefore, make sure that the money you will be saving by refinancing justifies the cost. You may also apply for a no-closing-cost refinance and save some money upfront. However, the closing costs and other borrowers’ expenses will be built into the principal, which means that you will have a bigger loan to repay and a higher interest amount. Some lenders may also offer a higher interest rate for a no-closing-cost refi. Therefore, your monthly payments will likely be higher, and you may lose money in the long run.
In some rare cases, prepayment penalties are another expense you may need to consider before applying for refinancing. Some mortgage lenders penalize homeowners who pay their loan before the end of the term, and you may need to pay a fee to offset the lender’s loss on the interest you did not pay.
Longer Loan Term
Keep in mind that refinancing resets your loan’s term. When you refinance, you replace your existing loan with a new one. For instance, no matter how long you’ve been carrying your current loan, by refinancing with a 30-year fixed-rate mortgage, you will start over and have a new loan term of 30 years.
If reducing the loan term is your priority, consider refinancing with a shorter-term loan, such as a 15-year or 20-year loan.
Mortgage lenders have strict lending criteria for any loans, such as credit score requirements, income, debt-to-income ratio, etc. It is also true of refinancing. If any of these elements changed since you last applied for a mortgage, it might affect your loan approval. For example, if your debt burden has increased, such as taking out a new auto loan, you may not qualify for a refi.
Is Now a Good Time to Refinance?
Interest rates have been on everyone’s mind since the Fed started rapidly increasing rates to slow down the galloping inflation. If you are looking to refinance at some point, you should definitely take into consideration the rising interest rates.
Many homebuyers refinanced their homes in 2021 to take advantage of the historically low interest rates and high property values that increased their equity. Today, the interest rates may be on the rise, but property values are still high. With the rising price of goods and services, some consumers are turning to credit card debt to finance their daily expenses. However, despite the higher interest rates, a second mortgage is still significantly more affordable than credit card or consumer loan debt. For property owners who have built a significant amount of equity, tapping into your home equity may be more cost-effective than the alternatives. A cash-out refi, for example, can help bridge some expenses.
Besides, interest rates are still lower than they have been in the past. According to mortgage experts, it is best to refinance when the interest rates are at least 0.75 percentage points lower than your current mortgage. However, smaller reductions may still be worthwhile if they can help you lower your monthly payments and free some of your budget for other increasing expenses.
Interest rates are likely to keep increasing for the foreseeable future. Therefore, if you have been on the fence about refinancing, it may be best to do so now rather than later.
After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.