How Soon After You Purchase A Home Can You Refinance?

| | Comments (0)

Legally, immediately.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. As of right now, they have been going through a broad and more or less steady increase for the last two years. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had been going down for the same amount of time, it might be a good idea to refinance, but that is not the case right now.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you. If your credit score has gone from 520 to 640, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. Now if you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values are retreating, not so much. If you bought any time in the last two years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites). All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

 



Buy My Science Fiction Novels!
Dan Melson Author Page

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Preparing The Ground
Preparing The Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link


The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link

The Book on Mortgages Everyone Should Have!
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover
What Consumers Need to Know About Mortgages Books2Read

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover
What Consumers Need to Know About Buying Real Estate Books2Read

Dan Melson's San Diego Real Estate and Mortgage Website

↑ Grab this Headline Animator

About this Entry

This page contains a single entry by Dan Melson published on February 17, 2008 7:00 AM.

Variable or Range Pricing of Real Estate was the previous entry in this blog.

Relying Upon Reputation: There Are No Silver Bullets is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

Powered by Movable Type 4.21-en
******

Enter your email address:

Delivered by FeedBurner


Copyright 2005-2017 Dan Melson. All Rights Reserved