How Soon Can I Refinance?
Published on July 24, 2024 | 7 Minute read
Melanie
Ortiz Reyes
Content Specialist
Refinancing your mortgage can be a strategic move to lower your interest rate, reduce monthly payments, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. However, how soon you can refinance depends on various factors, including the type of loan you currently have and the one you're looking to refinance into.
What is Refinancing?
Refinancing involves replacing your existing mortgage with a new one, often with different terms. The primary reasons homeowners refinance include:
- Lowering the interest rate
- Reducing monthly payments
- Changing loan terms (e.g., from 30-year to 15-year)
- Switching from an ARM to a fixed-rate mortgage
- Accessing home equity (cash-out refinance)
General Considerations Before Refinancing
Before diving into the specifics of different loan types, consider these general prerequisites and factors that influence the refinancing process:
1. Credit Score: A higher credit score can secure better interest rates. Aim to improve your credit score before refinancing.
2. Home Equity: Lenders typically prefer that you have at least 20% equity in your home. This reduces the lender's risk and can eliminate the need for private mortgage insurance.
3. Debt-to-Income Ratio (DTI): A lower DTI ratio indicates that you can manage your current debt load and handle new debt responsibly.
4. Closing Costs: Refinancing involves closing costs, which can range from 2% to 5% of the loan amount. Ensure you have enough savings to cover these costs or opt for a no-closing-cost refinance, which typically involves a higher interest rate.
5. Loan-to-Value Ratio (LTV): Lenders evaluate your LTV ratio, which is the loan amount divided by the appraised value of your home. A lower LTV ratio is favorable for refinancing.
Conventional Loans
How Soon Can You Refinance?
For conventional loans, there is no hard-and-fast rule about how soon you can refinance. However, lenders often recommend waiting at least six months to establish a payment history on your existing mortgage. This waiting period also allows you to benefit from any potential increases in your home’s value.
Requirements for Refinancing Conventional Loans:
1. Credit Score: Typically, you need a credit score of at least 620, but higher scores will qualify you for better rates.
2. LTV Ratio: Lenders usually require an LTV ratio of 80% or lower to avoid PMI.
3. DTI Ratio: A DTI ratio of 43% or lower is generally preferred, although some lenders may accept higher ratios.
4. Employment and Income Verification: Stable employment and income are needed. Lenders will verify your income through pay stubs, tax returns, and other financial documents.
5. Appraisal: A new appraisal may be required to determine the current value of your home.
FHA Loans
How Soon Can You Refinance?
For FHA loans, there are specific waiting periods:
- FHA Streamline Refinance: You must wait at least 210 days from the closing date of your current FHA loan and have made six on-time payments before refinancing.
- FHA Cash-Out Refinance: You need to have owned the property for at least 12 months and have made on-time payments for that period.
Requirements for Refinancing FHA Loans:
1. Credit Score: FHA streamline refinance has no minimum credit score requirement, but lenders typically look for a score of at least 580 for other FHA refinances.
2. LTV Ratio: For FHA streamline refinances, there's no appraisal required, but for cash-out refinances, an LTV ratio of 80% or lower is typically required.
3. Mortgage Insurance: FHA loans require mortgage insurance premiums for the life of the loan if the down payment was less than 10%. Refinancing into a new FHA loan can reset these terms.
4. Employment and Income Verification: Similar to conventional loans, lenders will verify your employment and income.
VA Loans
How Soon Can You Refinance?
For VA loans, the waiting periods include:
- VA Interest Rate Reduction Refinance Loan (IRRRL): You must wait at least 210 days from the date of the first payment on the existing loan.
- VA Cash-Out Refinance: There is no specific waiting period, but you need sufficient equity in your home.
Requirements for Refinancing VA Loans:
1. Credit Score: There is no minimum credit score requirement set by the VA, but lenders typically look for a score of at least 620.
2. LTV Ratio: For IRRRLs, an appraisal is not required. For cash-out refinances, an LTV ratio of up to 100% may be allowed.
3. Certificate of Eligibility (COE): You need a valid COE to prove your eligibility for VA loan benefits.
4. Residual Income: VA loans require borrowers to meet residual income guidelines to ensure they can afford their mortgage payments and other living expenses.
5. Employment and Income Verification: Lenders will verify your employment and income, similar to other loan types.
USDA Loans
How Soon Can You Refinance?
For USDA loans, the waiting periods are:
- USDA Streamline Refinance: You must wait 12 months from the closing date of the existing loan and have made 12 on-time payments.
- USDA Non-Streamline Refinance: There is no specific waiting period, but you need to demonstrate a history of on-time payments.
Requirements for Refinancing USDA Loans:
1. Credit Score: There is no minimum credit score requirement, but a score of 640 or higher is typically preferred.
2. LTV Ratio: An appraisal is required, and the LTV ratio should not exceed 100%.
3. Location: The property must be in a USDA-eligible rural area.
4. Income Limits: USDA loans have income limits based on the property location and household size. Your income must fall within these limits.
5. Employment and Income Verification: As with other loan types, stable employment and income are crucial.
Jumbo Loans
How Soon Can You Refinance?
Jumbo loans, which exceed the conforming loan limits set by the Federal Housing Finance Agency, often have more stringent requirements. There is no specific waiting period, but lenders typically recommend waiting six months to establish a payment history.
Requirements for Refinancing Jumbo Loans:
1. Credit Score: A higher credit score is required, typically 700 or above.
2. LTV Ratio: Lenders prefer an LTV ratio of 80% or lower.
3. DTI Ratio: A DTI ratio of 43% or lower is generally required.
4. Cash Reserves: Lenders may require substantial cash reserves, often six months to a year’s worth of mortgage payments.
5. Employment and Income Verification: As with other loans, stable employment and income are necessary. Lenders may also require detailed financial documentation due to the larger loan amounts.
Timing Your Refinance
Deciding when to refinance involves considering several factors:
- Current Interest Rates: If rates have dropped significantly since you took out your original mortgage, refinancing could save you money.
- Your Financial Situation: Ensure your credit score, income, and employment status are stable.
- Break-Even Point: Calculate the break-even point, which is the time it takes for your savings from refinancing to cover the closing costs. If you plan to stay in your home beyond this point, refinancing makes financial sense.
- Home Equity: The more equity you have, the better your refinancing terms will likely be.
Refinancing your mortgage can be a strategic move to improve your financial situation, but understanding the timing and requirements for different types of loans is important. Knowing the specific guidelines and waiting periods can help you make an informed decision.
Before proceeding with a refinance, evaluate your financial goals, consider current market conditions, and consult with a mortgage professional to determine the best course of action for your unique situation. With the right timing and preparation, refinancing can lead to significant savings and financial benefits.