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How Soon Can I Refinance My Mortgage?

By on February 26, 2014 in Mortgage

How Soon Can I Refinance My Mortgage?One of the worst feelings in the world is buying a home and seeing mortgage rates significantly drop one or two months after you close on the property. You’re happy because you got the home you wanted, but now you are seeing how much extra interest you are paying every single month. It sure would be nice to refinance the home, but can you turn around and immediately refinance?

Refinancing Your Home After Closing

How soon is too soon to refinance your mortgage? Can you do it five days after closing? There probably wouldn’t be need to, but legally speaking you should be able to refinance your mortgage whenever you want as long as you can find a lender that is willing to refinance you.

Therein lies the problem. Virtually no lender is going to let you refinance with them if you closed five days ago. Or a month ago. Or even two months ago.

How Soon Can I Refinance?

Realistically, the absolute earliest you could find a lender to refinance your home mortgage would be 120 days after closing. That’s four months of time. And even so, rates would have to drop significantly for paying closing costs again to really make sense.

Four months still might be stretching it. More realistically you could start looking for refinance loans after the six month mark.

Watch for Pre-Payment Penalties

The practice of having pre-payment penalties in a mortgage loan is not nearly as common as it was a few years ago. A pre-payment penalty is just what it sounds like: if you pay off the loan early there is a penalty that you have to pay first. You might find some loans with a 1 year pre-payment penalty limit, meaning that you must hold onto the loan for 12 months before you could pay it off with a refinance. Most loans won’t have this, but it is something to keep in mind when you are looking for a mortgage lender.

Why Wait 6 Months to Refinance?

Why do most lenders want you to wait at least six months before you refinance your home? There is a term called “seasoning” in the mortgage industry. This means that the investors that are buying your mortgage want to be able to reap some sort of profit off of buying the asset – your mortgage loan – from the lender.

Most loans are not kept by the bank that lends the money to you. The loan is underwritten, the loan is closed, and then within a month or two (if not immediately) is sold off to the mortgage-backed securities market. When it is sold it generates a quick profit for the lender and lands on the books of the investor that bought the loan. That investor is patient and willing to accept your interest payments as a slower return on their investment. If you turn around and close the loan two months after it is sold on the market, the buyer will be unhappy because they will have gotten very little if any profit on their investment.

Besides you shouldn’t need to refinance that often. Rates shouldn’t drop a ton over a few months. But if they do, start looking to refinance at six or twelve months. Make sure you run good calculations to show the benefit of paying for closing costs a second time at a lower rate. The lower payment and overall interest payments must be worth it for you to refinance again. Sometimes it makes more sense to just stay put with your current mortgage if the difference in rates isn’t that much.

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