Refinance After Mortgage Purchase

How long should you wait to refinance after mortgage purchase? While you don't want to refinance too soon and wind up paying closing costs all over again, a big enough drop in interest rates can make the idea of a refinance very appealing indeed.

Learn about different types of home loans.

"Refinancing" refers to obtaining a mortgage loan in order to pay off your existing home loan, preferably at a lower interest rate or more desirable loan terms. It is a common practice among homeowners, especially when interest rates take a sharp dip or after a homeowner's credit score improves enough over time to qualify for better mortgage loan terms. It is also common for homeowners to refinance after mortgage purchase in order to consolidate debt or to obtain some cash, which is referred to as a cash out refinance.

When a refinance is obtained, the original mortgage loan is paid off. The term "refinancing" is not used to describe a homeowner obtaining an additional loan based on the home's equity, which is referred to as a home equity loan or home equity line of credit.

Refinancing can make a lot of sense in certain scenarios:

• You have had your mortgage loan for several years and interest rates are much lower than when you first obtained your loan.
• Your current mortgage loan was obtained when your credit score was low, but now your credit score is higher and you qualify for a loan with much better terms.
• You want to combine a first mortgage along with an equity loan or equity line of credit into one low interest loan.
• You want to consolidate all your debt into one low interest loan that may additionally provide you with some tax benefits.
• You are about to move from your home, but you are going to maintain the home as a rental property, and you want to lower the monthly payments as much as possible before you no longer hold it as a primary residence.

How long do you have to wait to refinance your home after you buy it? In most instances, you can refinance your mortgage loan as often as you would like as long as there is a mortgage lender to approve you. Don't forget these important factors with regards to refinancing:

• You will have to pay closing costs again. Even if a lender advertises a refinance product with no closing costs, oftentimes this simply means the closing costs are rolled into the total cost of the loan. This may translate into no closing costs out of pocket, but you will wind up paying these fees along with interest.
• A small drop in interest rates does not justify a refinance. Since you have to pay closing costs all over again with a refinanced mortgage loan, you want the drop in interest rates to be worth it. Look for a drop of 2% or more.
• Be mindful of prepayment penalties. Don't refinance your mortgage loan until you have first made sure that you won't owe a prepayment penalty for paying off the first mortgage early. Some lenders put prepayment penalties into their loans as a way to make a profit even if the borrower refinances.

When applying for a mortgage refinance, be prepared to fill out all the applications again and to receive another home appraisal, just like when you first purchased the home. You may be able to avoid some of the process by applying with your current mortgage lender, but keep in mind that your current lender may not have the best interest rates of all the lenders out there.

If your main concern is lowering your interest rates in an attempt to make your payments smaller every month, consider inquiring about a mortgage loan modification program instead of a refinance.

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