Mortgage lenders have different guidelines when it comes to how soon after buying a home you can refinance the loan. Some lenders will give you a loan almost immediately while others may make you wait. Generally, lenders base how soon you can refinance your mortgage loan on the amount of equity you have in your home rather than on how long you’ve owned the home.
As a rule, lenders will not allow you to do a cash-out refinance loan until you’ve owned the home long enough to build adequate equity to cover the loan. While most lenders won’t make you wait a specified period of time before applying for a refinance loan to get a lower interest rate or change the length of the repayment term, you will probably have to have your home reappraised even if it’s been just a few months since the last appraisal. If you want to refinance to change the rate or term, a lender usually requires at least 5 to 10 percent equity in your home. If you go for a cash-out refinance loan, you will typically need more than 10 percent equity.
Risks to Lender
A lender is more likely to approve a refinance loan if you have a low loan-to-value ratio. In other words, if an appraisal shows that the value of your home is more than the total amount of money you want to borrow against it, your chances of getting approved for a refinance loan are good. If you have a high loan-to-value ratio and not much equity built up in your home, you may still get approved for a loan but the lender will charge you a higher interest rate. Some lenders want you to wait at least several months after buying your home before refinancing: this gives them the opportunity to see if you can make your mortgage payments on time.
Paying a Prepayment Penalty
Refinancing your mortgage doesn’t always save you money, especially if your mortgage contract includes a prepayment clause. Along with paying the penalty, you will also have the costs associated with taking out a new loan. If you refinance your home soon after buying it, you won’t have much equity in it yet unless you paid a large down payment at the time of purchase. Even in that case, a cash-out refinance needs to offer you enough benefit to make up for paying the costs of refinancing your home.
Besides the purchase price you pay for your home, the closing costs can add up to a hefty sum. The same goes when you refinance your mortgage loan. Although you may be able to get certain fees waived if you go with the same lender, refinancing your loan may require you to pay several other costs upfront. You may also have to pay a higher interest rate if you recently bought the home or want to refinance a short-term mortgage loan. Take the time to do the math to determine if it's worth it to refinance. Think twice before rolling the costs to refinance into your new loan as that, too, comes at a higher interest rate.
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