If the terms of your mortgage aren't ideal, you don't have to wait long to refinance. If you've only paid out 10 percent of your loan but have an opportunity to jump ship for a better rate, don't think you have to keep your original mortgage until the end. As long as you can afford to pay the fees involved in a refinance and no major penalties apply, you can move forward quickly.
Why Refinance Early
In a rush to buy or refinance your house, you may agree to terms that could cost you a lot over the long term. Maybe you didn't do enough research, or maybe nothing better was available at the time. Perhaps you got a higher rate due to a credit score that has since improved, or maybe you don't like the service at your current lender. Whatever your reason, if you can get a better rate, low or no closing costs, lender-paid closing costs or a streamlined, quick refinance, it is definitely worth pursuing.
Applying to Refinance
Applying for a refinance is similar to applying for a purchase mortgage. You find the right lender with the right rate and fill out an application. You provide supporting financial statements and authorization to run your credit report. If you made all payments as promised in the short time you've had your current mortgage, you will find it easier to get approved.
It can be expensive to refinance. Fees -- including application, rate lock, appraisal, attorney and title insurance -- can run you several thousand dollars. The money you save with the new mortgage can make up for it, though. Use a mortgage calculator to determine the number of months it will take you to recoup your closing costs. If you intend to stay in the home longer than that number of months, it is worth refinancing. If you can't afford to pay those closing costs upfront and don't want to roll them into your refi, you will need to find a lender who's willing to refinance without billing you for closing costs.
Another consideration when refinancing is a prepayment penalty. Certain lenders offer prepayment penalty mortgages with lower rates and closing costs. If you chose to go this route with your initial mortgage, you will have to pay the penalty when refinancing with only 10 percent paid out. If you have a 2 percent prepayment penalty and a $200,000 principal balance, you will pay a $4,000 prepayment penalty. You will have to either add this to your refi loan amount or pay out of pocket at closing. Prepayment penalties typically do not apply after the first three years of the loan. Review your original promissory note to see when yours expires before moving forward.