How Soon Can You Refinance a Home?
Often, after a home buyer purchases his home, he will wish to replace the loan he used to purchase the property with another loan that carries more favorable terms. The process of replacing one mortgage with another mortgage is called refinancing. Technically, a mortgage holder can refinance a home loan as soon as he has taken out the loan. However, it will seldom be financially beneficial to do so immediately.
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Refinancing
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When a home loan is refinanced, it means that one lender is buying up the existing mortgage, paying it off completely, and issuing the borrower a new loan. There is no legal restriction on how soon after taking out a mortgage a borrower can trade it for a new one. Mortgages seldom, if ever, totally bar borrowers from paying off the mortgage early--the main requirement for refinancing. However, many mortgages include prepayment penalties.
Prepayment Penalties
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Many mortgages carry prepayment penalties, in which the borrower is required to pay an additional fee if the mortgage is paid off before the time originally scheduled. If a mortgage with a prepayment penalty is refinanced, the new lender would pass these charges onto the borrower. While the borrower can still refinance the home, paying a prepayment penalty raises the cost of doing so and may nullify some of the financial benefits of refinancing.
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Additional Charges
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In addition, when a person refinances a home, he must generally pay many of the same fees that he paid when he took out the original home loan. For example, the borrower will likely have to pay a broker's fee and an appraisal fee. Given that the main goal of refinancing is to reduce the financial burden of the homeowner, refinancing too quickly may cause the borrower to pay fees that might otherwise be avoided.
Considerations
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Most homeowners choose to refinance when their financial situation changes, either positively or negatively. For example, a homeowner may choose to refinance when his credit score goes up or interest rates go down, as he will likely get a better deal on a new mortgage. Similarly, if the homeowner loses his job, he may attempt to refinance into a mortgage with smaller sized payments. While he can refinance immediately, only in certain cases will his financial situation have changed enough in a short period of time that refinancing will make financial sense.
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