Don’t dismiss a refinance even if your loan is brand-new
You’ve recently closed on your mortgage. But you see that mortgage interest rates have dropped.
You’re wondering: How soon can I refinance? Is it worth the cost and hassle?
Don’t dismiss the idea outright. Consider this: Refinancing into a lower rate — even a slightly lower rate — may save you thousands over the life of your loan.
And refinancing sooner in your loan term is better than doing it later.
Look at your long-term plans. You may decide, like so many already have, that refinancing now is worth it.
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Keeping your loan a while? Cut your interest payments by $29,000
Your previous home buying or refance process wasn’t easy. There was a lot of red tape involved, and the closing costs were expensive. So why would you want to repeat all those steps again?
There are plenty of good reasons.
First, you may be able to save a lot of money. Mortgage interest rates have dropped recently. At the time of this writing, a 30-year fixed rate is well below 4 percent. That’s down from an average of nearly 4.5 percent over the past year. Rates haven’t been this low since 2016.
Say you recently closed on a $250,000 mortgage for 30 years at a 4.5 percent fixed rate. Assume you now have the opportunity to refinance at 3.75 percent, resetting the 30 years. You’ll save close to $100 a month on your mortgage payments. Add that up over 30 years, and you will have paid almost $29,000 less in interest.
But if you count on staying put for a while, this strategy is totally worth it.
“It makes sense to refinance if the interest payment savings make up for all the related costs and fees associated with closing a new mortgage,” says Gay Cororaton, senior economist for the National Association of Realtors.
Other reasons to refinance now
Another reason to refinance is that you can lower your monthly payment. In the previous example, that owner could save nearly $100 a month by refinancing. That kind of green adds up fast. And it can make a big difference as your life situation changes.
That kind of green adds up fast. And it can make a big difference as your life situation changes.
Maybe a baby is on the way. Perhaps you want to buy a new car. Or you’re seeking to salt away more money toward a college fund. These are all important motives to lower your mortgage payments.
Refinancing sooner versus later can also be a good strategy if you:
- Want to take extra cash out (tap your equity) to pay for something big like a remodel, automobile, or debt consolidation.
- Need to take a partner off your loan due to a recent separation.
- Have an FHA loan, for which you pay private mortgage insurance (PMI), and want to eliminate your PMI payments.
- Have seen a boost in your credit score recently; you may qualify for an even lower interest rate with a higher credit score.
A refinance is not always just to lower your payment, but can help you accomplish your financial goals.
Refinancing earlier in your loan term is better than later
Truth is, it’s never too early to think about refinancing after already closing on a mortgage.
“There is no minimum time wait. A mortgage is a contract. As soon as you can get a better deal, you should terminate the contract and take that better deal,” says Realtor and real estate attorney Bruce Ailion.
Closing attorney Chuck Biskobing says there are no major risks to refinancing within a year or so of purchasing.
“I’ve seen people refinance three times in a year to follow falling interest rates,” says Biskobing.
“Say you want to apply the money saved each month back to the loan in the form of accelerated payments toward the principal,” he says. “If so, you will almost certainly pay off the new loan faster than the old loan. And you’re not adding enough time on the loan to really matter.”
In other words, you’re not resetting your loan term by much if you’re just six or eight months into your mortgage.
But if you’re much further into your loan—say five to 10 years—resetting to a new 30-year mortgage may not pay off. To calculate if it’s worth it based on your remaining term, try this refinance calculator.
“What’s most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings you’ll earn?” asks Ralph DiBugnara, president of Home Qualified.
“The best candidates for refinancing are those with high mortgage rates relative to a new lower rate, who intend to stay for a long time in their home, and have the cash ready to pay for closing costs,” Cororaton says.
Alternatively, the lender can roll the closing costs into the mortgage within the principal or in the form of a higher interest rate.
But that “higher” interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makes the decision to refinance an easy one.
Some have to wait longer than others
Keep in mind that some borrowers may not be allowed to refinance too soon after closing.
“Most lenders require you to wait at least six months before you can refinance with the same lender again,” DiBugnara notes.
Lastly, while it’s rare, note that some lenders charge a prepayment penalty fee that could derail your refinance plans. Check to see if your existing loan has a prepayment penalty clause.
No need to worry about refinancing “too soon”
Refinancing is worth it if you discover that you can save monthly or over the life of the loan.
Most mortgage shoppers aren’t at risk of refinancing “too soon” and can apply even shortly after their previous loan closes.
Check your refinance savings and don’t miss out on lower housing costs.