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Whether you’re a first-time homeowner or have done it all before, buying a new home is an exciting time with a lot to get done. What if you’re still settling into the neighborhood and mortgage interest rates drop lower than your current rate? Refinancing your mortgage loan could potentially help you save on interest and lower your monthly mortgage payments.

While there are many great reasons to take out a new loan, there is such a thing as refinancing too soon. To find out if the timing is right to refinance, first, calculate closing costs and fees and how much it can change your payment. Most importantly, figure out how long it will take for you to break-even. The answers to these frequently asked questions will help guide when you can refinance and weigh the pros and cons of refinancing quickly after purchasing a home.

When can you start refinancing your home?

Generally, six months of payments are required on your current loan before you can qualify to refinance. However, timing is subject to specific loan program guidelines.

When is a good time to refinance your home?

The best time to refinance depends on your financial situation and reasons for refinancing. Some borrowers do a quick review of their mortgage once a year to check whether a refinance would be beneficial. Others review when interest rates drop. If you’re considering refinancing a mortgage loan, it’s a good idea first to calculate how much it can change your payment and when you’ll reach the break-even point. The break-even point is how long it’ll take for the amount you save with lower payments to outweigh the expense of refinancing. If you plan to sell your home before your break-even point, it doesn’t make sense to refinance.

What are the pros and cons of refinancing quickly?

Regardless of when you decide to refinance, there are both advantages and disadvantages.

Pros of refinancing soon after purchase

  1. Save on interest payments: If interest rates have dropped since your loan closed, a refinance may be advantageous. With a significant rate drop, you can potentially save on interest payments and lower your monthly payments.*
  2. Take advantage of better credit: Has your credit score improved recently because you’ve been making your mortgage payments on time, every time? If you’re now eligible for a more favorable interest rate, it may be a good idea to take advantage of your improved credit by refinancing sooner rather than later.
  3. Take advantage of better credit: Did you get a promotion or a raise at work? If your income has gone up since your original loan closed, you may qualify for a shorter-term loan. Conversely, if your income has decreased, you may choose to refinance to a longer-term loan to lower your monthly payments.

Cons of refinancing too quickly

  1. Your credit score may temporarily be lower: Because a mortgage adds to your debt and involves a hard credit inquiry, your credit score may temporarily dip when purchasing a new home. However, if you consistently make your mortgage payments on time and keep your debt-to-income ratio low, mortgages can boost your credit score in the long run. By waiting to refinance, your credit score could improve, increasing your chances of qualifying for an even better rate.
  2. You may not recoup your costs: Low interest rates are tempting; however, the costs of a refinance could cancel out potential savings. Refinancing your mortgage can carry most of the same fees and expenses as your initial purchase mortgage—including an appraisal, processing fees, and other loan closing costs.
  3. There may be penalties: Check to see if your home loan carries an early payoff penalty before obtaining a mortgage refinance.

Guild Mortgage was ranked in the top-10 mortgage lenders in 2020 by The Mortgage Reports based on its experience, good loan options and strong customer satisfaction ratings. Contact me today to discuss the refinance advantages for your specific situation and verify your refinance eligibility.

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