Timing is crucial when it comes to refinancing your mortgage.
Whether you are considering refinancing soon after a home purchase or years down the road, the right timing can help you make the most of the financial benefits.
What's in this article?
In this brief guide, we’ll take a look at the factors that determine how long you should live in a home before refinancing so you can make the best decision for your unique circumstances.
Factors that influence how soon you can refinance
When a homeowner refinances their current mortgage, they are replacing it with a new one with different terms.
A homeowner also may be refinancing to take cash out of their home equity.
Common reasons to refinance include:
- Lower your interest rate
- Shorten the loan term
- Tap into home equity
- Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage loan (FRM)
- Replace a VA or FHA loan with a conventional loan
Several factors will influence the decision to refinance your mortgage.
Time limitations of current loan
Mortgage lenders often require borrowers to wait for a certain period of time before they are eligible to refinance.
The exact waiting period varies by lender and loan type, ranging from days after closing to one year.
We’ll go into more detail on this later in the article.
Amount of equity in the home
Homeowners build equity in their homes as they make their monthly mortgage payments.
Many lenders prefer that you have at least 20% equity in your home before refinancing, whether you’re getting a rate-and-term or a cash-out refinance.
Current interest rates
One of the best opportunities for refinancing is when interest rates drop.
If rates are lower than when you first took out your mortgage, it may be the perfect time to refinance. Waiting probably makes more sense if they are about the same or higher.
Financial situation
A homeowner’s financial health is a significant determining factor in whether they are eligible to refinance.
You will have to qualify for a new mortgage just as you did with your current mortgage, including meeting certain credit score, income and debt requirements.
If your credit has improved since you got your current mortgage, you may be eligible for better terms—including lower rates.
On the other hand, if your credit or debt is worse, it may be better to wait until your situation improves.
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How long do you have to wait to refinance?
The waiting period for refinancing generally depends on the type of loan you have and the type of refinance.
Conventional loans
Lenders typically require homeowners to wait at least six months to one year before refinancing a conventional loan.
Some lenders will allow borrowers to refinance sooner for rate-and-term refinances as long as they meet the loan-to-value ratio (LTV) requirements, while cash-out refinancing often requires at least six months and 20% equity in the home.
FHA loans
FHA loans are popular for first-time buyers and those who need to make a lower down payment amount.
FHA refinances typically have a 210-day rule, which means borrowers must wait at least 210 days from closing to refinance.
Borrowers also must make at least six consecutive, on-time payments before refinancing.
VA loans
VA loans, offered exclusively to veterans and active-duty service members, typically have a similar 210-day waiting period to refinance; and they require six consecutive, on-time payments.
Borrowers with existing VA or FHA loans can refinance to a conventional mortgage.
Each lender approaches refinances differently, so it’s important to consult a trusted, VA-approved lender such as Compass Mortgage before deciding.
Signs its time to refinance
Like purchasing a home, refinancing is a personal decision that depends on your goals and finances.
However, here are some classic signs that give borrowers the “green light” to reach out to a lender for options.
Interest rates drop significantly
One of the most common questions homeowners ask is: “How much do rates need to drop before I can refinance?”
The general rule is that rates should drop by at least 0.5% to 1%, probably resulting in lower monthly mortgage payments and a reduction in the total interest paid over the life of the loan. Of course, this ideal percentage varies based on the size of your loan.
Our Compass Mortgage loan officers also suggest that you determine if the reduced payments from a lower interest rate will enable you to recoup the closing costs for refinancing within one year.
Check out Compass Mortgage’s Refinance Calculator to estimate your savings.
You’ve built up significant equity in your home
As homeowners build equity in their homes, they decrease their LTV and reduce their overall risk to lenders.
Homeowners with at least 20% home equity often have access to better loan terms and interest rates and eliminate the need to pay private mortgage insurance (PMI).
Additionally, borrowers can tap into higher amounts of equity with a cash-out refinance.
You’ve improved your credit score
Borrowers with excellent credit scores show lenders that they are reliable and trustworthy, and they achieve the potential for more favorable rates and terms.
For example, if you got your original mortgage with a credit score of 620 and have raised it to 740 or higher, it may be worth checking with a lender to see if you can obtain a lower interest rate.
Scenarios where refinancing isnt ideal
It’s important for homeowners to remember that refinancing involves closing costs and fees, and the benefits are best realized over the long term.
Let’s look at some scenarios where refinancing may not be the best option.
There is a prepayment penalty
Some mortgages have prepayment penalties if borrowers try to pay off their loans early or refinance before a specified period of time.
Check your current mortgage agreement for details, or reach out to Compass Mortgage to discuss specifics.
If your mortgage includes a penalty for early repayment, determine whether it’s worth refinancing or if you should wait until the period expires before proceeding.
You’re planning to move soon
Closing costs and fees typically add up to 2-6% of the loan amount.
If you don’t intend to stay in the home long enough, you may be unable to recoup these costs before you move.
You could also end up paying more in interest in the long term if you extend your loan term.
Refinance your loan with Compass Mortgage
Refinancing is a big decision for homeowners.
Compass Mortgage treats our borrowers like family, with the personal attention you deserve when making life-changing financial decisions.
We’ll be your partner and advocate, helping you determine the best course of action.
Ready to see how much you could save by refinancing? Apply for a refinance today.