Determining How Soon Can You Refinance Your Mortgage

Do you want to know how soon can you refinance your mortgage?  Most homeowners are also asking this question.  This is because current interest rates are hitting historic lows today.  

Technically, there is no legal limit on when can you refinance.  It is possible to close your mortgage today and take out a refinancing tomorrow.  However, this scenario will not make sense.  

The thing is if you are holding a mortgage for at least one or two years, then you are within your legal rights to apply for refinancing.  It also does not matter whether you are refinancing your original loan or another refinance loan.  

However, do take note that almost all lenders will not approve your application if your current mortgage is less than a year old.  Moreover, your lender could impose restrictions on how soon you can get out of the loan.  Normally, you should stay with your current loan for at least a year so you can refinance without penalties.  But this is not always the case.  

Understanding Prepayment Penalties 

There are mortgage loans that come with prepayment penalties that apply for at least five years or more.  Penalties usually phase out over time. This means there are lower penalties if you refinance on the fifth year compared to getting out of the loan in the second year.  

Prepayment penalties will not prevent you from refinancing.  However, the penalties could reach up to 3 percent of the loan balance which could make refinancing very expensive.  It is very important to check if your current mortgage has prepayment penalty so you can avoid unpleasant surprises when you refinance. 

Reaching the Break Even Point 

Some homeowners have a wrong notion that repeated refinancing can affect the break even point.  This refers to the length of time that the savings from refinancing will equal the closing costs.  Normally, you can achieve the break even point in four to seven years.  

So if you do not intend to stay in your home for very long, then there is no point in getting a loan refinance.  However, it is not true that you will lose money if you refinance before the break even point.  When you take out a mortgage refinance, you are actually saving money.  You should only think about the break even point of the new loan.  That is because all the costs of the old loan will be rolled into your new loan.  

Declining Equity is a Bigger Problem

Declining equity is a big concern if you refinance too soon.  Because home values have been declining over the past years, your equity will also decline.  This will make mortgage refinancing too expensive.  You will find it more difficult to find refinancing if you have lost your equity to your home.  You will also pay for new private mortgage insurance if your equity goes below 20 percent of the current home value.  

There is no problem if you will apply for refinancing today.  You have every right to apply for this type of loan.  But your current mortgage may have some restrictions that will make it more difficult for you to get refinancing.  

Article Tags: Break Even Point, Current Mortgage, Break Even, Even Point

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