Even though you just closed on a mortgage, you shouldn’t hold back from refinancing if an opportunity for savings presents itself right away. The mortgage and housing industries are constantly changing. Rates and values go up and down regularly. If you’ve just moved into your new house with a decent, but not ideal, mortgage, you can refinance immediately if a better deal pops up and the benefits of doing so outweigh the costs.
The Refinance Process
When you refinance your mortgage, you get a new loan that replaces your existing one. Theoretically, you can do this at any time after closing. You just have to qualify for your new lender’s terms. Assuming you haven’t amassed a ton of debt in the short time since you’ve closed and you’re looking at a lower rate and payment, you shouldn’t have a problem qualifying. You will have to complete an application and provide financial information to the new lender just as you did to get your existing loan.
The major benefit of refinancing is saving money over time through a lower interest rate. On a monthly basis, the savings will be noticeable. Over the life of the loan, the savings can be astounding. For example, a $300,000 mortgage at 5 percent for 30 years will cost $1,610.47 per month, with total interest of $279,764.96 to be paid over the life of the loan. That same mortgage at 4.5 percent will have a monthly payment of $1,520.06 with total interest of $247,218.25 over the life of the loan. That’s a difference of $90 per month and more than $32,000 during the life of the loan. The sooner you can refinance, the more you’ll save.
The major deterrent to refinancing right away is the cost. You will have to pay an application fee to start. Then you need to pay for a new appraisal if the new lender won’t use the report from your recent purchase mortgage. You will have to pay title insurance and other closing costs all over again, and that can run several thousand dollars. To top this off, your existing mortgage might have a prepayment penalty that can cost you several thousand dollars more. If you’re going to refinance right away, make sure you can afford it.
If you’re just looking for a lower rate but can’t afford to refinance right away, see if your lender is amenable to a rate modification. If a competitor’s rates are lower or the lender’s own rates suddenly fall, it might agree to modify the loan. You will pay a flat fee, usually less than $1,000, and sign a loan modification document. You will have the benefits of a refinance without having to go through the process and pay the associated costs.
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