I Just Bought My House Seven Months Ago -- Can I Refinance Now?

The decision to refinance must be carefully considered.

Refinancing a mortgage involves getting a new loan with a lower interest rate in order to pay off the existing, higher-rate loan. As a general rule, you can refinance whenever you like. However, certain clauses in your mortgage agreement might make refinancing after only seven months an unwise financial decision.

Basics

Refinancing is simply the process of paying off an existing loan with a new one. Assume that your current mortgage rate of 5.5% translates into monthly payments of $1,000 and because of a decline in interest rates, you can now get a mortgage loan at only 5%. Further, imagine that your outstanding loan balance is $200,000. Under such conditions, it would probably make sense to borrow $200,000 from another bank and pay off your existing mortgage to get rid of the $1,000 monthly expense and instead pay only, say, $920 per month to the new bank for the mortgage loan at 5%.

Cost vs Benefit

Unfortunately, refinancing always involves an initial cash outlay, which means that a lower rate is not always enough to make it a profitable choice. Referred to as "closing costs," these expenses involve fees paid to the bank for completing the paperwork as well as the cost of an appraisal. The appraisal is usually mandatory to ensure that the home is in good enough condition to sell for enough to pay off the loan in case you default. If, for example, these closing costs are $2,500 and your monthly savings only $50, you may not wish to refinance. If you have less than 50 months left until the loan is fully paid off, the savings simply do not justify the costs. Even if you have, say, five years or 60 months left, the net savings of $500 spread over five full years would probably not justify straining your budget with a sudden $2,500 expense, which could be better used to pay off high-interest credit-card debt.

Term Extension

Another instance where refinancing is attractive occurs when you wish to extend the term of an existing loan. Let's say you have 10 years until your loan will be paid off and the interest rate on your existing mortgage is only 5%. Current rates are 5.5%, and as always, refinancing will involve closing costs. In other words, you will not only make higher monthly payments if you refinance, but you must also lay out the upfront cash. Could it ever make sense to refinance under such conditions? It could if you are having a very hard time making the monthly payments and can find a lender to refinance your outstanding balance with a 30-year fixed-rate mortgage, likely lowering your monthly payment significantly.

Quick Refinaincing

Legally, you can get a new loan to pay off an existing mortgage at any time you like, whether it has been seven months or 17 years since you bought your house. However, your loan agreement could contain clauses that force you to pay a penalty if you refinance in less than a certain period. If a prepayment penalty of this kind is stipulated, you must add this to the closing costs of the new loan when determining whether a refinancing makes economic sense. Since mortgage rates rarely move dramatically within seven months, this is relatively unlikely, though it can't hurt to crunch the numbers.

The second common reason to refinance is also unlikely to apply in your situation. If it has been only seven months since you bought your house, you would probably turn a 29-year-five-month mortgage into a 30-year mortgage, meaning that the term extension would be minimal. In short, while there is no legal reason you cannot refinance after only seven months, it is unlikely that doing so will be a profitable decision.

References

• MortgageLoan.com: How Soon Can Your Refinance Your Current Mortgage?