How Soon After You Purchase A Home Can You Refinance?

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Legally, immediately. This also applies to refinance loans.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. Loan rates went through a broad and more or less steady increase in 2004-2006, although they seem to have leveled off after that, but for the past few months have plunged off a cliff. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had dropped, it might be a good idea to refinance (like at this update), but prior to that refinancing wasn't going to save most people money. Still fine to do so if you had a sufficiently good reason, but those are a lot more rare than "I can get a lower rate without paying a cent or adding a nickel to my balance!" One reason it takes so long to refinance right now is that just about everybody who can is doing so, and therefore the lenders are backed up like the worst traffic jam you've seen in your life.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you where it really counts, in the cost of money. If your credit score has gone from 520 to 740, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. If you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. Furthermore, "cash out" loans have generally less favorable rate/cost tradeoffs than "purchase money." If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values have been retreating and are ready to stabilize, not so much. If you bought any time in the last few years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

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6 Comments

Stephen said:

Hello, I purchased my house in July 2009 for $77,000 at 5.5% interest rate. I was thinking about refinancing to lower my payments and pay off some debt. What are your suggestions/opinions?
Thank you

Dan Melson Author Profile Page said:

Not nearly enough information given to formulate an answer.

I'd need to know some things like current and projected debt to income ratio - in other words, how much you make and what your other debts are. I'd also need to know current loan to value ratio to know if there's any money available to pay off debt. You can't take equity out if there is no equity. I'd also need to know things like your approximate location - city and state - because many states and municipalities tax refinancing - and in some cases it's heavy. How much it costs is always a necessary piece of information to know if spending that money to get a lower interest rate is worthwhile.

I'm pretty sure you're not in California given your purchase price, and I don't work outside California currently so don't know exactly what the taxes are for places outside. Also given the comparatively low loan amount, every lender I'm aware of has surcharges ranging around a point and a half. My gut feeling is that you're not likely to be able to save enough on your interest rate to make it worth the cost of doing, but I can't know without all of the information.

Scott said:

Dan,

I am hoping this might be an oddball case but maybe you can tell me. I am looking into buying a short sale home and getting an FHA loan. The house is appraised around 250k but am getting for 200k. Initially will be putting down the 3.5% FHA min down pmt. Immediately after closing there will be 20% +equity in the home but FHA guidelines as you know state you must pay PMI for 5 years minimum. With the newer increased PMI for FHA does it make sense to refinance to eliminate the PMI very soon after closing? I know there will be fees associated with the new loan but the PMI savings alone is $150+ per month.

Scott

Dan Melson Author Profile Page said:

Unfortunately, lenders have been hit by too many cases of fraud in situations like this. As a result, they will generally only believe an annualized rate of increase in value of 10% for the first year after purchase. If you buy for $200k, they might believe $210k after 6 months, $220k after a year. If you can show receipts for major repairs or remodeling, that might change. Otherwise, you can figure waiting a year to get them to believe the higher value.

Cornelius said:

In a similar position as scott posted on 12/1,buying a fannie mae home, getting an FHA 203k loan. The house appraised at 140k but getting for 99900. Initially will be putting down the 3.5% FHA min down pmt. the service providers for the 203k program are coming in almost double(11K) what it costs to do the reno if I went to home depot/lowes off the street (6k) they can't get the items on sale as they are offering in the stores or online. trying to determine if I should proceed with the 203k program w/ costs at 5k higher or purchase regular FHA and refinance shortly after closing for the cash to do the renovations. updating countertops and fixtures in kitchen & baths and other minor areas

Dan Melson Author Profile Page said:

Depends if you're willing to wait at least a year, more likely two before you refinance. If not, do the 203k

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This page contains a single entry by Dan Melson published on January 1, 2014 8:30 AM.

Avoiding Foreclosure in Bankruptcy was the previous entry in this blog.

When You Should Not Buy Real Estate is the next entry in this blog.

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