How Long Before You Can Refinance?
In the mortgage industry, each type of loan has a different set of rules and regulations to which a lender has to adhere. Each lender also has its own individual set of rules that it has created for itself. The amount of time a person has to wait to refinance depends greatly on the set of rules that the lender is legally required to follow. The amount of time a loan has been active is known as "seasoning." This article is meant to be a guide to the overall concept and may not be applicable in all situations.
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What is seasoning?
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The seasoning period is the amount of time between the closing of the loan on a house and the current point in time. You may have lived in a home for several years, but if you refinanced your home a month ago your loan has only been seasoned for a number of days. Seasoning begins the literal date that your loan was closed.
FHA Refinancing Rules
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FHA, the Federal Home Loan Administration, has the most stringent rules for seasoning of a loan. In most cases, a person is required to wait a standard 6 months before they are allowed to refinance his home.
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Non-Traditional Mortgages
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Many times, a customer is under a crunch to purchase her home in a set amount of time. In this situation, a customer takes out a short-term loan (90 to 120 days) to purchase the home and then refinances into a long-term mortgage.
This same concept is true for a "construction to perm" mortgage. This type of mortgage is really two loans with only one closing. The first loan pays for the construction, while the second loan becomes a long-term note to finance the house over 20 to 30 years.
There are very few options for 0 percent down payment loans. Sometimes, a bank will lend a buyer money to purchase a house that is priced under value. Then, the buyer can turn around and refinance that loan into a permanent mortgage using their equity as downpayment. You cannot use equity as a down payment on a purchase of a home for a traditional mortgage.
In any of the above scenarios, the customer does not want to wait a full 6 months for seasoning to occur. Usually, a customer can get a conventional loan through a Fannie Mae or Freddie Mac product with little to no seasoning.
Investment Property
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The rules on investment property vary based on the lender, but most of the time, a customer is required to wait a full year after their initial purchase to be able to refinance. This is to help with the mortgage fraud that has gone on in the industry with investment property. There are exceptions to the rule, but usually you are required to wait that full year.
When should you refinance?
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There are a number of scenarios when it is a good option to refinance.
First, look at the numbers. If you will save more than a full percentage point in your monthly interest rate, it is time to consider refinancing. If you will save more than two full percentage points (i.e. drop in the rate from 7 percent to 5 percent), you should definitely refinance.
Once you see the difference in the rate, if you are able to pay for the closing costs in under two years, it is also a good time to refinance. Look at your difference in monthly payment and divide that number into the total amount of closing costs. That will give you the number of months to break even. If it is 24 or less it is a good option, unless you plan on moving before you break even.
If you have several loans that you are trying to combine into one, refinancing is an option that should lower your overall monthly payments. But there is a big negative to this. If you roll other debt into your home, you are paying for that debt over the life of your mortgage. You need to think long and hard before you choose this option. You can offset this by making your payments as if you still had the higher payment in order to pay down the principal.
How can I pay my mortgage off faster without refinancing?
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On a 30-year mortgage, if you make one extra payment a year, you cut the total life of the loan by 7 years. On a 30-year mortgage, if you make two extra payments a year, you cut the total life of the loan almost in half.
An easy way to make an extra payment a year, without having to fork it all out at once is to pay bi-weekly instead of monthly. This equals out to 26 payments per year, the equivalent of 13 monthly payments. It is much easier to budget this way.
If you ever make an extra payment on your mortgage, make sure it goes toward principal and not toward future payments. The only way it helps to pay ahead to future payments is if you are going to be out of town on your next payment due date.
It makes the biggest impact on your loan as a whole if you make principal reduction payments in the first few years of the loan. That is when a majority of your payment goes to interest and not principal.
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