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With mortgage rates near-record lows, many homeowners might be asking themselves: Is it too soon for me to refinance?
Refinancing your mortgage is an excellent way to lower your interest rate and save money on your monthly payment. In fact, the fourth quarter of 2020 broke a record from nearly two decades ago for refinance volume in a single quarter.
When it comes to how soon you can refinance your mortgage, though, it depends on the type of loan you have.
Conventional Loan Refinance Rules
In general, there’s no required amount of time you must wait before refinancing your conventional mortgage. Theoretically, you could refinance immediately after purchasing your home. However, some lenders may prohibit borrowers from immediately refinancing under the same lender.
“Some mortgage lenders have a “seasoning” period, which is a fixed amount of time you must wait before you can refinance your home loan,” said Mark Ireland, senior loan originator at Waterstone Mortgage in Arizona. “If your mortgage lender has a seasoning requirement, you may be able to skirt it by applying with a different lender.” You’ll want to make sure your existing loan doesn’t have a prepayment penalty, Ireland said.”
The rules work slightly differently for cash-out refinances, which is when the borrower takes out a larger refinance loan to take out some of their equity in the form of cash. In this case, the borrower must have purchased the home at least six months before the new loan.
Also, remember that each lender has a loan-to-value (LTV) requirement, which refers to the maximum amount you can borrow compared to the value of the home. Even if you meet the time requirement for a cash-out refinance, you may still be ineligible if you don’t have enough equity built up in the home.
FHA Loan Refinance Rules
An FHA loan is backed by the Federal Housing Administration. It is designed to help low-to-moderate income borrowers buy a home with a lower down payment and credit score requirements than on a conventional mortgage.
The FHA offers several different refinance options, and the rules to qualify vary depending on the type of refinance you choose.
- Cash-out FHA refinance: The borrower trades equity in their home for cash during their refinance. To qualify for a cash-out FHA refinance, a homeowner must own and occupy the residence for at least 12 months.
- Rate and term refinance: The borrower takes out a new loan with a new rate, term, or both while leaving the original principal intact. To be eligible, the original loan must exist for at least 12 months. For loans less than 12 months, borrowers are limited to 85% LTV. All payments in the past six months must have been on time, and you can only have one late payment in the previous six months.
- Simple refinance: The borrower refinances their existing FHA loan to a new FHA loan. To be eligible, you must have made at least six months of on-time monthly payments. If you’ve owned the home for longer than six months, you can have no more than one late payment in the previous six months.
- Streamline refinance: Allows FHA borrowers to refinance their mortgage without the typical requirements such as an appraisal and extensive paperwork. To be eligible for a streamline refinance, the borrower must have made at least six monthly payments and have had the mortgage at least 210 days. All payments within the past six months must be on time, and at least five of the six payments before that must have been on time.
VA Loan Refinance Rules
A VA loan is either originated by or guaranteed by the U.S. Department of Veterans Affairs to enable military service members or veterans to buy a home with no down payment. These loans often come with better terms and interest rates than conventional mortgages and, despite the no down payment, don’t require mortgage insurance.
The VA offers two different types of refinance loans:
- Interest rate reduction refinancing loan (IRRRL)
- Cash-out refinance.
For both types of refinances, the homeowner must be up-to-date with their mortgage payments, and at least 210 days must have passed since the first mortgage payment.
USDA Loan Refinance Rules
The U.S. Department of Agriculture has a loan program to help individuals in rural areas buy homes with no down payments and low interest rates. These come in the form of either direct loans or loans through private lenders guaranteed by the USDA.
The USDA offers three different types of refinances: non-streamlined, streamlined, and streamlined-assist.
- For a streamlined or non-streamlined loan, you must have made on-time loan payments for 180 days prior to your loan application.
- To be eligible for a streamlined-assist refinance, you must have made on-time loan payments for 12 consecutive months prior to your loan application.
Jumbo Loan Refinance Rules
A jumbo loan is a mortgage that is greater than the lending limits set by Fannie Mae and Freddie Mac. In 2021, the maximum loan amount for a single-family home is $548,250 for most areas and up to $822,375 for high-cost-of-living areas.
Jumbo loans have similar refinance rules as conventional mortgages. There’s no set amount of time you must wait before you can refinance. Because they aren’t backed by Fannie Mae or Freddie Mac, these loans are subject to each lender’s requirements and may have stricter underwriting requirements than conventional mortgages.
Is Refinancing Right for Me?
If you haven’t refinanced your mortgage during this time of record-low interest rates, it’s worth exploring whether you’re eligible and whether it’s the right choice for you.
“Anyone who has debt owes it to themselves to explore if that debt can be cheaper,” says Lauren Anastasio, CFP at SoFi. “It doesn’t matter what your age, income level, property value, etc. If you owe someone money and you think there’s a chance you could borrow that money cheaper, anyone should look into it.”
When you’re applying for a mortgage refinance, make sure to shop around for the best refinance rates. Just because your current mortgage lender offered you the best deal when you initially bought the house doesn’t mean that will be the case for your refinance.
Whether you bought a home three months ago or three years ago is “irrelevant,” Anastasio said. “What’s most impactful is how long you plan to stay.”
You can calculate your estimated savings before you start, to see if refinancing is worth your while, experts say. NextAdvisor’s refinance mortgage calculator can help you estimate your break-even period, which is the amount of time it takes to offset the closing costs of a new mortgage.
“Consider how much your payment will go down and how long it will take you to recover the costs,” said Bill Samuel, owner of Blue Ladder Development, a Chicago-based home buying company. “Figure out your break-even point and decide if you’ll be in the property that long.”