Most of us remember the good old days of 3% and 4% mortgage rates. But the end of the pandemic also killed the mortgage rate party as inflation took hold and rates soared. Still, many of us bought homes, sucked up the rates we got, and waited to refinance. With the recent rate cut, many homeowners may be considering a refinance.
But how soon can you refinance a mortgage if you’ve purchased a new home? And just because you can, does it mean you should?
Waiting periods to refinance
How long does it take to refinance a home loan? It depends on the program and the lender.
- Fannie Mae and Freddie Mac home loans are called “conforming” mortgages because they must conform to standard guidelines. Fannie and Freddie impose no waiting period for refinances unless you want to cash out. There is a 12-month waiting period for cash-out refinancing.
- Other conventional (non-government) mortgages have waiting periods from zero to six months (or more if prepayment penalties exist). These non-conforming loans are not standardized, so your rules depend on the lender.
- FHA requires you to have made at least six monthly payments to refinance for its streamline (FHA-to-FHA) program, and at least six months must have passed (you can’t prepay and then refinance sooner). For a cash-out refinance, there’s a 12-month waiting period.
- The Veterans Administration requires VA home loans to be at least 210 days old and for you to have made at least six monthly payments. That holds true even for a streamlined Interest Rate Reduction Refinance.
- The USDA requires that you have made all payments on time for the last 180 days. You must wait 12 months for the Streamline Assist program.
You can refinance a government-backed home loan to a conforming loan with no waiting period.
How to “buy now refinance later”
If you don’t plan to keep your home or loan very long, paying as little as possible for your mortgage often makes sense. If you plan to refinance ASAP, there’s no point in paying higher fees to get a lower interest rate. It might make sense to “buy your rate down” if you need a lower interest rate to qualify for your home purchase or if your seller is willing to pay those fees for you.
Otherwise, though, you may be able to save a ton on closing costs by accepting a higher interest rate. Some lenders, for instance, offer “rebate pricing” or “no-cost” home loans, which cover some or all of your closing costs in exchange for accepting a higher interest rate. And that can make sense – there’s little reason to buy a lower rate for 30 years if you expect to refinance within a year anyway.
Be “refi-ready”
Mortgage rates can be pretty volatile when the economy is uncertain. Global events like wars can cause rate spikes, while economic misfortune can send them crashing down. It’s not usual or likely, but it’s smart to be prepared.
- Monitor your credit score and fix any errors if they pop up.
- Avoid applying for new credit because inquiries cause your scores to drop slightly. Also, increasing your balances and payments can make qualifying for a home loan more difficult.
- If you carry credit card balances, use this time to pay them down or off. Balance-to-limit makes up 30% of your credit score, so this helps you qualify for a better refinance rate.
- Avoid major purchases or big changes like quitting your job.
- Pay bills on time to protect your credit.
- Keep the information and documents needed to apply in a physical or virtual file. It can also be helpful to have your original closing documents at hand.
Refinance transactions can close very quickly if you’re ready to pull the trigger.
Refinance considerations
Refinancing costs money—typically 2% to 3% of the loan amount. So, going after lower rates doesn’t always make sense.
Consider how long you expect to have your home. Many buyers, especially younger ones, only keep their properties for three to five years. It’s smart to run your numbers through a refinance breakeven calculator to see how long it will take to recoup your refinancing costs with lower payments.
One advantage of refinancing early is that you’re not adding many years to your home loan repayment schedule. Restarting your mortgage after several years can increase your costs in the long run, even if you get a lower interest rate because you’re taking longer to repay your home loan. That might be a good decision if it makes your home more affordable. But you should understand whatever price you’re paying in exchange for this.
Today’s mortgage rates have come off last year’s uncomfortable highs, and there may be opportunities to refinance. Just make sure it’s right for your situation.