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How Soon Can You Refinance a Mortgage?

tl;dr

What You Need To Know

  • How long you must wait to refinance a mortgage depends on the type of refinance you want
  • The waiting period for refinancing can range from 0 – 12 months
  • To qualify for a refinance, some requirements apply, including making timely payments or, in some cases, coming up with closing costs

Contents

For many homeowners, their monthly mortgage payment is their biggest recurring expense. Refinancing can be an attractive option if it gets you a lower interest rate or shortens the life of your loan. 

In 2020, there was a refinancing boom fueled by a drop in interest rates during the coronavirus pandemic. Refis were such a hot commodity that they helped drive total mortgage closings 65% above the 2019 figure![1]

However, interest rate reductions aren’t the only reason why a homeowner might want to consider refinancing. If you have equity in your home (the difference between what you owe on your home and the value of your home), refinancing your mortgage can help you get cash to use for paying off other debts or making a major purchase or investment. 

But how soon can you refinance the mortgage after purchasing your home? And what are the rules and guidelines you’ll need to know to successfully refi? The answers to those questions will depend on the type of loan you have and the type of loan you want to have. 

When Can You Refinance a Mortgage?

The rules you’ll follow to refinance will be determined by the type of mortgage refinance you want. 

So, for example, if you have a VA-backed loan and you want to refinance it with a conventional mortgage loan, you’ll have to apply the rules associated with conventional mortgages.

Assuming you want to pay to refinance your brand new mortgage, most conventional and jumbo mortgage loans can be refinanced almost immediately. But, if you want to move fast, you may have to refi with a different lender. Some banks have waiting periods to refinance a loan. The waiting period may not apply with a new lender.

If you want a cash-out refinance, you have to own the home for 6 months or more, even if it’s a conventional mortgage. 

You must have at least 20% equity in your home to take cash out. Depending on the market and the size of your down payment, reaching that benchmark could take longer than 6 months to achieve.

What Are the Reasons To Refinance a Mortgage?

One of the main reasons people refinance their mortgage is to get better mortgage interest rates. If your credit has improved since you first bought your home, you might qualify for a better deal now. And if overall market rates have dropped, you might be able to score a better deal even without a change in your credit.

Refinancing your mortgage can also shorten the length of the loan. If you’ve had a salary increase or paid off another debt and hope to pay your mortgage off sooner, you can refi for a term reduction. 

Another popular reason to refinance a mortgage is to get cash out. If you owe less than what your home is worth, you can refinance closer to the total value of the home. The funds from the refinance will pay off your existing loan, and you’ll get what’s left over in cash. 

People use cash-out money for a variety of reasons, including:

  • Home remodels or improvements
  • Consolidating other debts at a lower interest rate
  • Making large expenses
  • Covering costs for medical bills 
  • Paying educational expenses

In some situations, borrowers refinance to take someone off a loan. In the case of a divorce, one partner might refinance the loan to take their former partner’s name off. 

Loan types can play a really important role in these kinds of situations. For instance, a USDA Streamline and Non-Streamline refinance lets you add or remove people from a loan. But a USDA Streamline-Assist refinance only lets you add people.

Homeowners also decide to refi so they can change their loan terms, lowering their monthly mortgage payments and getting rid of private mortgage insurance (PMI).

A final (and less common) reason for refinancing a mortgage is to switch lenders. In this case, a refi lets you move your mortgage to a new bank with potentially better policies or customer service.

How Often Can You Refinance Your Home?

Legally, there’s no limit on how many times you can draw from the proverbial “refinance well.” But you’ll usually be limited by some practical considerations.

Closing costs and other fees can make refinancing an expensive proposition. And if you’re looking to cash out equity in your home, eventually you’ll max out that equity. You’ll need to pay the mortgage balance down a good bit before you can try again.

Another factor to take into consideration is your credit score. If your lender runs a hard credit check every time you apply, it can damage your credit score if you apply too often. 

What Are the Rules for Refinancing Conventional Loans?

If you want to use a conventional loan to refinance your existing mortgage, there usually isn’t any waiting period. So, if your FOMO is rising while interest rates are dropping, a conventional mortgage might be the right option for you.

To score a conventional mortgage refinance, you’ll usually need:

  • A good credit score: The conventional wisdom is to have a credit score of 620 or higher.
  • A qualifying debt-to-income (DTI) ratio: To calculate your DTI, you need to add up all of your recurring, monthly bills, including your estimated mortgage payment, and divide it by your gross monthly income. The result should be no more than 43% of your gross monthly income.[2]
  • Proof of income: Lenders will want paperwork that confirms that you have enough income coming in to make your monthly mortgage payments.

Depending on the lender, you may have to get your home appraised. This is an out-of-pocket cost (think: your pocket), so you should factor the cost of an appraisal into your total costs to refinance.

What Are the Rules for Refinancing Jumbo Loans?

In general, all the rules that apply to conventional loans apply to jumbo loans. Because these are large loans for properties that cost hundreds of thousands or even millions of dollars, stricter underwriting guidelines may apply.

What Are the Rules for Refinancing Government Loans?

The rules for refinancing government-backed mortgages are more complex. Here’s a quick overview: 

  • Federal Housing Administration (FHA) loans: The FHA backs several types of refi options. All of the FHA refinance options will require that you’ve made at least six monthly mortgage payments before you can refinance. 
  • Department of Veterans Affairs (VA) loans: To refinance a loan with a VA-backed loan, you’ll have to meet the VA’s service requirements and have to have made at least six monthly mortgage payments or have held the mortgage for at least 210 days.
  • U.S. Department of Agriculture (USDA) loans: The USDA offers several loan types for refinancing. The guaranteed loan has a 12-month waiting period, and the direct loan has no waiting period. 

When you refinance a government-backed loan with a conventional mortgage, you typically follow the rules that apply to conventional refis. But, if you want to refinance an existing mortgage with a government-backed option, the rules get a bit more complex. 

FHA loans

The Federal Housing Administration offers four types of refinance options: 

FHA streamline refinance

This is the only option that allows you to refinance an existing FHA mortgage with another FHA mortgage (also called an FHA-to-FHA refinance). Requirements include[3]:

  • Six months of mortgage payments or holding the mortgage for at least 210 days (whichever is longer)
  • Being current on the loan (you can’t use this option if you’re delinquent on payments)
  • Taking out (aka withdrawing) no more than $500
  • Refinancing with an FHA Streamline refinance has to result in a net tangible benefit (the advantage a borrower gets from refinancing). The FHA bases the net tangible benefit on factors like the type of loan being financed, interest rates and loan terms. 

One benefit of the FHA Streamline refinance is that you don’t have to get a home appraisal. And, in many cases, you can fold your closing costs into your loan.

Rate and term refinance

You can use this option to refinance your loan, even if the original mortgage isn’t an FHA loan. Requirements include[4]:

  • Six months of mortgage payments or holding the mortgage for at least 210 days (whichever is longer)
  • Being current on the loan (you can’t use this option if you’re delinquent on payments) 
  • The refi can’t result in net tangible benefits. 
  • The new loan has a maximum loan-to-value (LTV) ratio of 97.75%.

FHA simple refinance

In general, these loans have the same requirements as rate and term refinances.[4]

FHA cash-out refinance

If you have equity in your home and you want to take it out in cash (which qualifies as a net tangible benefit, BTW), you might consider an FHA cash-out refinance loan. You can use this option to refinance a current FHA mortgage or another type of mortgage. Requirements include[5]:

  • Occupying the home as your primary residence for at least a year
  • Making all mortgage payments on time for at least a year
  • A maximum debt-to-income (DTI) ratio of 43%

Some loan-to-value (LTV) ratio requirements also apply, but it depends on the value of your home and how much cash you want back from the refinance. You’ll also have to pay 1 month of your mortgage insurance premium (MIP) at closing and continue to pay MIP each month.

VA loans

The VA offers two main types of mortgage refinance options. The first type is the VA Interest Rate Reduction Refinance Loan (IRRRL). It’s designed to help qualifying veterans and family members reduce interest rates for more affordable monthly mortgage payments. 

The second option is the VA cash-out refinance, which allows qualifying borrowers to withdraw some of their home’s equity in cash. 

For both loans, you must have held the original mortgage for at least 210 days or long enough to make six monthly mortgage payments.[6] The lender will also review your financial situation, including credit history, debts and income to ensure that you can make the payments on the new mortgage. 

USDA loans

USDA-backed loans come in two flavors: direct and guaranteed. They’re both designed to help home buyers in rural areas. 

With a direct refinance loan, there’s no waiting period. With a guaranteed refinance loan, the waiting period is 12 months from when you closed on the original mortgage.[7]

You can also take advantage of a few programs for refinancing a USDA loan into another USDA loan. They include streamlined, non-streamlined and streamlined-assist.

USDA streamline refinance

You may not need a home appraisal, and you can add your closing costs to the loan. You must have made on-time payments on your existing loan for 6 months and meet USDA loan credit requirements.[7]

USDA non-streamline refinance

You will need a home appraisal (which makes this option the slower of the three options). You can fold your closing costs into the loan as long as it doesn’t push the loan past the LTV requirement. You must have made on-time payments on your existing loan for 6 months and meet USDA loan credit requirements.[7]

USDA streamline-assist refinance

This option usually doesn’t require a home appraisal, and closing costs and other fees can be added to the loan. You must have made on-time mortgage payments for the past 12 months.[7]

What Should I Consider Before Refinancing?

It’s important to consider your current financial situation and the outcome of the refinance. Yes, there are benefits – but there are also fees and credit requirements. 

Before you decide to refinance, look at:

  • How much the loan will cost you in fees and closing costs and whether that’s more than what you might save in interest
  • Your credit report and overall situation and whether you’re ready to apply for a mortgage
  • Potential prepayment penalties if you’re paying off your existing mortgage with a new one
  • Whether a refinance is worth it if you only have a short term left on your loan

Basically, it’s time to break out the mortgage refinance calculators and run some numbers.

Will refinancing affect my credit score?

Yes, refinancing may impact your score – at least temporarily.

When creditors evaluate you for a loan, they run a hard inquiry. That shows up on your report and can drop your score a bit for about a year. And because you’re closing an old loan to open a new one when you refinance, it can also impact the age of your credit, which is a factor in calculating your score.

Ready To Update That Old Mortgage Payment?

Refinancing is an option for homeowners who want to save money and get a more affordable mortgage payment. If you decide that refinancing is right for you, research your options and compare what you qualify for to your future financial needs and goals.

  1. Consumer Financial Protection Bureau. “Mortgage refinance loans drove an increase in closed-end originations in 2020, new CFPB report finds.” Retrieved October 2021 from https://www.consumerfinance.gov/about-us/newsroom/mortgage-refinance-loans-drove-an-increase-in-closed-end-originations-in-2020-new-cfpb-report-finds/ 

  2.  Consumer Financial Protection Bureau. “What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?” Retrieved October 2021 from https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791

  3. U.S. Department of Housing and Urban Development. “Streamline Your FHA Mortgage.” Retrieved October 2021 from https://www.hud.gov/program_offices/housing/sfh/ins/streamline

  4.  U.S. Department of Housing and Urban Development. “Loan-to-Value and Combined Loan-to-Value Mortgage Amount Calculation Comparison.” Retrieved October 2021 from https://www.hud.gov/sites/documents/08-40MLATCH.PDF

  5. U.S. Department of Housing and Urban Development. “Section B. Maximum Mortgage Amounts on No Cash Out/Cash Out Refinance Transactions.” Retrieved October 2021 from https://www.hud.gov/sites/documents/4155-1_3_SECB.PDF

  6. U.S. Department of Veterans Affairs. “Exhibit A – Frequently Asked Questions (FAQs).” Retrieved October 2021 from https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_20_16_exhibita.pdf

  7. U.S. Department of Agriculture. “USDA Loan Refinancing.” Retrieved October 2021 from https://www.rd.usda.gov/files/RD-SFH-RefinanceNotes.pdf

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In Case You Missed It

Take-aways

  1. Some government-backed refinance options have a faster turnaround time because you can skip the home appraisal
  2. Almost all refinance options require on-time payments on your existing mortgage for at least 6 months
  3. If you have equity in your home, you can get cash-out refi benefits that let you cover other expenses

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