Introduction Some of the reasons why one may decide to refinance a mortgage include to get a better interest rate, pay less on monthly installments, have a shorter mortgage period, or to gain access to home equity. However, most of the mortgages have restrictions on when and how often a loan can be refinanced. In this article, you will be able to find out how soon you will be able to refinance your home loan in terms of initial conventional refinance rules and regulations.
Refinancing and Recast Periods Familiarity with conventional loans and government-insured mortgages such as FHA, VA, and USDA loans reveals that these loans possess a “recast period” indicating when one is permitted to refinance the loan. A recast period is the minimum time that you must wait before refinancing and getting a new loan that will enable you to get a fresh start on repaying your loan. These periods are intended to prevent abusive practices such as ‘churning’ of loans for the benefit of the lender.
The recast period for conventional loans is typically 120 days following the closing of the original loan. FHA loan has the longest recast period and it is seven or 180 days. It is also noteworthy that both VA and USDA loans enable the refinancing of the initial mortgage after making only one payment.
At times the lender may choose not to apply the recast period or minimum payment if it is more advantageous to refinance the loan. But most will stick to these rules. Refinancing too soon looks suspicious and could make it difficult to qualify for the next affordable loan.
Give Mortgage Recast a Thought First Before going directly to the refinancing process during the recast window, you should also approach your lender and ask if they can recast your existing loan. Known as re-amortization, recasting adjusts the loan amount, the interest rate and the monthly payments but lets you keep with the existing mortgage. This helps to avoid costs such as appraisal, credit check, and fees associated with the refinancing.
Rate and Term Refinancing The common type of refinancing is called rate/term refinance. Borrowers seek to refinance in order to reduce the monthly payments by fixing lower mortgage rate. Your new loan amount is restricted to your existing mortgage balance plus reasonable expenses for the new loan.
It is possible to refinance at a new rate and term after the recast period, however the pricing for the new rates will depend on the current market rates and your credit worthiness profile. It is worth mentioning that the best rates are provided to customers with good credit and enough home equity.
Cash-Out Refinancing Borrowers also use cash out home equity for large purchases, to pay off credit card debts, or for home improvements. The new loan amount is greater than the present balance, sometimes even significantly greater, on the basis of the present equity. These loans may be more vulnerable when used to refinance in the first one or two years of an original mortgage.
Most of the lenders do not allow cash-out refinancing for the first six months to a year on the property after purchase or refinance into the existing loan. If allowed earlier, rates are likely to be higher and possibly fees compared to the long-term loans. Cash-out refis also generally come with a need for higher levels of equity than do rate and term refis.
Other Refinancing Rules In FHA loans, when doing a refinance during the first year after closing, the whole underwriting process is repeated again, including credit reports, income/employment checks, and appraisals. All other government and conventional loans may use the original home value up to six months after the purchase; however, full underwriting is still required.
If you had problems with qualifying for your previous loan, it will be impossible for any lender to approve early refinancing based on equity or property values. Improvements that transform your financial status significantly may lead to the removal of restrictions but most of the issue would lead to waiting 12 months and above.
The Mortgage Interest Tax Deduction for Refinances Refinancing essentially resets one of the most commonly claimed homeowner deductions as well. Note that early refinancing prevents claiming mortgage insurance as a tax deduction if you paid mortgage insurance premiums on your purchase loan or had acquisition debt over $ 750000.
In rare instances only, there are deviations from the above-discussed rules of refinancing. However, one can expect to wait for about two to six months before refinancing a home loan that has just been closed.
