Are you considering refinancing your current home loan? Whether it’s to get a better interest rate, a different loan term, change your loan type or tap into the equity, you should first understand the refinancing guidelines by loan program. It’s equally important to assess your situation to determine if refinancing is the most sensible option or if you should hold off.
Can You Refinance Your Mortgage at Any Time?
Being able to refinance your loan offers more flexibility, but not every type of loan enables immediate financing. Some loan programs are free of restrictions, which means you can refinance your home as soon as you close and the loan is funded. In other instances, though, you’ll have to wait six months to refinance. This is because most lenders have a seasoning requirement that prevents borrowers from getting refinances every week or month. It’s common to wait at least six months between refinances, but if you want to get a refinance sooner, you can work with a different lender. Some financial institutions and credit unions will let you skip the traditional seasoning and give you a refinance right away, but this does not apply to a cash-out refinance.
Your home equity also plays a role in when you can refinance a loan. For example, some mortgage lenders won’t let you refinance if you have a loan-to-value (LTV) ratio of 80% or higher. Other lenders offer exceptions. The great thing about mortgage refinances is that there’s no maximum number of refinances over the life of the loan, as long as you wait for the 6-month seasoning or switch to another mortgage lender.
Does Refinancing Impact Your Credit Scores?
Each time you apply for credit, the lender or creditor accesses a copy of your credit report. This is generally referred to as a hard inquiry and can drop your credit score by a few points. However, the impact is typically short-lived as hard inquiries are only factored into your credit score for 12 months and remain on your report for up to two years.
So, refinancing your home loan won’t cause much damage to your credit rating if you refrain from opening other new credit accounts or submitting several credit applications in a short period. Refinancing your mortgage only has a meaningful impact on your credit if you do it often, combine it with other loan and credit applications, and fall behind on payments.
How Soon Can You Refinance By Loan Type?
Conventional Loans
- Conventional Mortgage: Freddie Mac and Fannie Mae are popular mortgage choices for homeowners. You may have used these loans to purchase your home, but what about a refinance? It turns out there’s no waiting period if you use a different lender to refinance your mortgage. However, refinancing with the same lender could require a six to 12-month waiting period.
VA Loans
- VA Streamline Interest Rate Reduction Refinance Loan (IRRRL): There’s a six-month waiting period that begins on the day your first monthly payment is due. In some instances, lenders will also want to see 12 months of timely mortgage payments before considering you for a refinance.
- VA Cash-Out Refinance: These loan products are subject to the same rules as VA Streamline IRRRLs.
FHA Loans
- FHA Simple Refinancing: You’ll need to make six consecutive monthly payments on time to be eligible for refinancing.
- FHA Streamline Refinancing: Like standard mortgages and FHA refinances, six timely payments are required. You’ll also have to wait an additional 210 days unless you’re planning to get a conventional loan instead.
- FHA Cash-Out Refinance: You need to occupy the home for at least 12 months before you’re eligible for this loan product.
USDA Loans
- USDA Non-Streamlined: Borrowers must make 180 days of on-time payments to qualify for a USDA non-streamlined refinance loan.
- USDA Streamlined-Assist: The timeline for consecutive, on-time payments increases to 12 months for USDA streamlined-assist refinance loans.
Jumbo Loans
- Jumbo Loans: These loans follow the same refinancing guidelines as conventional loans. You generally aren’t required to wait for a set period to refinance unless you’re using the same lender that you currently have.
When It May Be a Good Idea to Refinance Your Home
Refinancing your mortgage is an important decision. But, unfortunately, you get a new mortgage and can’t undo a refinance. Of course, there are some good and bad reasons to get a refinance, but if it’s for any of these reasons, refinancing your mortgage can make sense.
You Can Get Better Interest Rates
If interest rates have improved since you took out your mortgage loan, refinancing could make sense. It could also save you several thousand in interest over the loan term. And even if mortgage rates haven’t improved, a higher credit score could position you for a lower rate on your new loan. Trimming some basis points off your current rate can make a big difference in how much you pay. Looking at credit card interest rates truly highlights how much of an impact this number can have on your monthly bills.
You Want to Change Your Loan Terms
Refinancing also allows you to switch to a shorter or longer loan term. A shorter loan term makes sense if your monthly mortgage payments fit comfortably into your budget and you’d prefer to pay more each month to eliminate the balance faster. Plus, you’ll save a bundle in interest if you change the original mortgage to a shorter-term loan. But if you want a more affordable monthly payment that works for your budget, you can refinance to reset the loan term. (Keep in mind that a longer loan term also means you’ll pay more in interest over time). Many real estate investors refinance their loans and make them longer to reduce monthly payments. This choice increases their cash flow, the most critical metric for most real estate investors.
Some borrowers also refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. ARMs come with fluctuating interest rates that make it challenging to predict monthly mortgage payments. But with a fixed-rate loan, the principal and interest payment is set for the entire loan term. So your monthly payment won’t change, and some people prefer the consistency that a fixed rate provides.
You Want to Eliminate Mortgage Insurance
If your down payment was under 20 percent, it’s highly likely that you’re paying private mortgage insurance (PMI) each month. This form of coverage shields your lender from substantial financial losses if you default on the mortgage and remains intact until you reach 20 percent in equity. At that point, you can ask the lender to remove it and keep more of your hard-earned money in your pocket.
The rules are slightly different for FHA loans, though. Mortgage insurance is required for the entire loan term, which could make switching to a conventional loan a good option. A refinance is the quickest way to get out of private mortgage insurance if you use an FHA loan. The only other options are paying PMI for 11 years or the life of the loan, depending on the loan. You can get better terms by switching to a conventional loan once you build up enough equity.
You Want to Tap into Your Home’s Equity
Cash-out refinances let you convert a portion of your home’s equity into cash. You’ll receive the amount you borrow shortly after closing, and your current loan will be replaced with a new one that includes your existing mortgage balance and the equity you took out.
The funds can be used how you see fit, and the borrowing costs are generally lower than you’ll find with several other debt products.
When It May Not Be a Good Idea to Refinance Your Home
If You Plan on Moving
You’ll pay closing costs when you refinance, which could easily amount to several thousand. It may be a small price to pay for the benefits you’ll receive from refinancing your home loan, but you won’t be able to capitalize on these perks if you plan on relocating soon.
If the Long-Term Costs are Higher
It’s vital to calculate the long-term borrowing costs associated with refinancing. The lender can help you run the numbers to determine if a lower monthly payment provides more of a benefit than the interest you’ll pay over time. These loans offer short-term relief, but the long-term payments aren’t worth it for everyone.
If You Can’t Make the Monthly Payments
Are you considering a shorter loan term to pay off your home faster? If it stretches your budget too thin, you may be better off sticking with your current mortgage to avoid defaulting on the loan and facing foreclosure. The only thing worse than staying in debt longer is to rush to pay off the debt sooner and stumble near the finish line because of elevated monthly payments.
If You Don’t Have Enough Equity
Lenders require you to have a certain amount of equity in your home before they consider you for a refinance. So be sure to inquire before applying to avoid any surprises. Homeowners with small equity positions won’t receive much cash after selling their homes. You’ll have time to repay the loan and build equity again, but keep this in mind if you plan on selling soon.
