You’ve gone through the long process of buying a new home, paid the closing costs, and are all settled in.
You’ve noticed interest rates dropping and might question how long you have to wait to refinance to get a lower monthly payment.
The answer isn’t the same for everyone, and it varies based on what you’re trying to accomplish by refinancing and the terms of your loan.
Benefits To Refinance Your Home
First, ask yourself why you want to refinance. One of the most popular reasons is to lower your monthly payment, especially if interest rates drop significantly.
Some lenders restrict refinancing to 120 to 180 days after they issue the mortgage, so if you’re dead set on getting new terms for your loan, you might need to consider looking at a different lender if you don’t want to wait.
Second, to refinance would be if you want to modify the type of loan you have to get a different rate or term as a new home buyer, especially if your circumstances change.
Third, to refinance would be if you want to pay your loan from buying a home off faster than the original terms allow. You could utilize a cash-in refinance option to build equity in your home while getting a lower interest rate.
Things To Consider Before Refinancing
Keep in mind that refinancing requires paying closing costs all over again. Determine if the new terms are worth paying thousands of dollars again. It will take time to break even after you get new terms.
As an example, assume your closing costs for a refinance are $2,000 for a monthly savings of $150. It will take you almost 14 months to recoup your investment. If you intend to sell your home because you’re actively embarking on a property search before the break-even point, it’s not a wise idea to get a new loan because it’ll cost you more in the long run.
A pre-payment penalty clause exists in some mortgages, which means you’ll pay the penalty for paying off the loan before the initial terms allow. It’s not that common for lenders to put these in the loan terms for people looking at homes to buy, but always check with your lender before actively pursuing a refinance on your current mortgage.
Lenders also want to make sure they aren’t perceived as flipping loans or engaging in poor lending practices, so you might need to show a history of on-time payments before they will offer a loan with new terms.
The term of the loan restarts when you refinance, which means if you’re three years into your loan and have 27 years left, you’ll have to make payments for the next 30 years. Make sure the additional three years is worth the interest you’re paying.