December 14th, 2019 10:23 AM by Jackie A. Graves, President
Sooner than you may
think, but make sure refinancing your home loan fits your financial goals.
IF YOU'VE HAD YOUR mortgage for a while
or have built equity in your home, you may have thought about refinancing your
mortgage. How soon you can refinance depends on the type of mortgage you have.
It also depends on the type of refinance you're interested in.
There are a few different types of mortgage refinancing options available,
depending on the details of your situation.
Special loan programs, like Federal Housing Administration
loans, may have varying time requirements for when you're able to refinance,
based on the type of refinance. For example, you must have made at least 12
monthly payments on your FHA loan to be eligible for an FHA cash-out refinance.
However, an FHA Streamline Refinance requires a minimum of six monthly payments
and for your FHA loan to be at least 210 days old.
"Unless you are on a special loan program, there isn't
usually a timeline of when you can refinance if you are going with a different
lender," says Joseph Polakovic, owner and CEO of Castle West Financial, an
investment advisory and retirement planning firm in San Diego.
However, the new lender may probe you about your reasons for
"For the most part, the new lender wants to be sure they
are not going to get in trouble for churning the homeowner into unnecessary
fees, like new loan origination fees and other
closing costs," says Polakovic.
Although you may technically be able to refinance immediately,
you should be able to clearly identify how refinancing your mortgage may
benefit your financial and life goals.
There's no universal "right" reason for refinancing a
mortgage. There are a few common situations that may make a mortgage refinance
an option, even if you're not very far into your loan term.
A Sudden Drop in Interest Rates
A dramatic fall in mortgage rates can mean thousands of dollars
in savings. For example, let's say you purchased a $500,000 home and put a 20%
down payment of $100,000. With a fixed mortgage rate of 4.702%, you'd spend
$347,012 in interest alone over the next 30 years.
If, after nine years, you refinance into a new mortgage with a
principal amount of $270,000 at a fixed rate of 3.952% for 30 years (assuming
$6,000 in closing costs), refinancing would save you $793 per month. Your
lifetime savings would be $45,171.
When deciding whether a rate drop is worth refinancing, it's
important to evaluate your break-even point. This point is the number of months
it would take you to recoup the cost of refinancing, based on your monthly
A Recent Income Change
A lot about your employment status can change over the years.
Unexpected and financially destabilizing events, like a job loss or pay cut,
are everyday realities that can affect your ability to pay your mortgage.
If your income changed significantly, you may want to look into
refinancing as a way to lower your monthly payments by extending your loan
term. However, you should keep in mind you may pay more interest over the long
A Substantial Credit Score Increase
Your credit score is one of the
main factors that influences your mortgage rate. A credit score boost of a few
points might not be enough to justify a refinance, but if your credit score
spiked in a short time, you might be eligible for a lower rate.
Your score might experience a jump because you recently paid off
a large debt or a bankruptcy mark on your credit report just expired. You may also
have noticed a major error in your credit report that has been weighing down
your score since your first took out your mortgage.
Mike Cornelius, branch manager at Motto Mortgage Experience, a
loan origination company in Brea, California, had a client who was interested
in refinancing a mortgage and also planned to pay off a significant amount of
debt in the next two months.
The client had good credit but stood to
increase it to excellent after resolving the debts. That person was then able
to take advantage of a 0.25 percentage point savings on interest, so it made
sense to wait just a bit for much greater savings, Cornelius says.
You Experience a Marital Status Change
Another scenario where a mortgage refinance might be an option
is if your marital status has changed. Your current mortgage contract may not
permit changes in the named borrower on the loan.
Whether you recently got married and want to include your partner
in the mortgage contract or got divorced and need to have an ex-spouse removed,
that can be done by obtaining a new loan.
You Want to Cash Out Equity
Cashing out some of the equity of your home through a refinance
is a helpful way to get money. When you take out the new loan, you'll borrow
more than your existing loan and use the difference as you need. The amount you
can borrow is typically 80% to 85% of your home equity.
You're free to use the cash toward whatever you need, such as a
home improvement project, medical treatment or consolidating debt. Borrowing
against your home's value can be risky, so do your due diligence by speaking to
a mortgage professional to ensure it's a wise move for you.
You Want to Switch From an Adjustable-Rate Mortgage
Refinancing your mortgage might be an option if you'd like to
change from an ARM to a fixed-rate mortgage. An ARM may offer a rate that's
lower than the market for a defined time but may adjust up or down afterward,
depending on the market.
If you want to switch to a more consistent monthly payment, for
example, you might turn to refinancing as a way to secure a new fixed mortgage.
Although there are many reasons you may want to refinance, there
are serious implications and costs associated with doing so.
Depending on what your purpose is for refinancing, there can be
disadvantages that can impact your financial goals and even thwart the savings
Refinancing a mortgage comes with upfront costs. You'll need to
pay for many of the same kinds of closing costs you paid for on your first
mortgage, like origination fees, appraisal fees and lending fees.
Some mortgages charge a prepayment penalty for paying off the
entire loan early, which adds to the overall cost. If your lender imposes a
penalty, it typically applies if you refinance within three or five years. It's
a good idea to take a look at your contract to factor any penalties into
consideration before refinancing your mortgage.
Cornelius advises borrowers to really dive into the numbers to
ensure refinancing is worthwhile, particularly if you don't plan on keeping
your home for more than three years.
"However, if (borrowers) are planning on keeping the home
long term and maybe even using the home as an investment property down the
road," says Cornelius, "it might make great financial sense to get
the costs of their home down as low as possible so their long-term investment
potentially pays greater dividends."
It's useful to plug all of your numbers into a refinance
calculator to help you see how much you stand to save per month, your
break-even point compared with refinancing costs, and your lifetime savings
Being informed about all of your mortgage options, and the pros
and cons of refinancing, early in the process is essential to making a decision
you can feel comfortable with moving forward.
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