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From time-to-time residential real estate owners may want to refinance their property, trading in a current loan for a newer model, perhaps one with less interest, smaller monthly costs, or better terms. But, if you’re looking for a quickie refinance, you may be in for a surprise.
It turns out that many loan programs require borrowers to wait six months, a year, and maybe even longer before they can refinance.
What is Refinancing?
In general terms there are two forms of refinancing.
First, there is rate-and-term refinancing, a situation where you replace an existing mortgage with financing of the same size but a lower rate.
Second, there’s cash-out refinancing. In this case you replace your current loan with a bigger one. Cash from the new mortgage is used to pay off the existing loan and closing costs, plus you leave closing with the remaining money. In some cases that “remaining” cash can amount to five-figure, six-figure, and even seven-figure amounts.
When Does Refinancing Make Sense?
While refinancing may seem attractive, it does not work for all homeowners. Simply put, refinancing can be very good in some situations and not-so-good – or even bad – in others.
The trick is to find the refinancing option that works best for you. What you’re looking for is called a “net tangible benefit.” This is a fancy term that means the borrower is getting a clear boost from the transaction. Such benefits can include one or more advantages such as:
- A lower interest rate.
- A shorter loan term.
- A lower monthly cost.
- Changing from an adjustable-rate mortgage to a fixed-rate mortgage product.
- Getting cash from the transaction.
- The removal of one or more original borrowers from the debt. This is something that often happens in divorce situations.
While there are often many positives associated with a mortgage refinance, there can be negatives as well. One is that refinancing is not free, there are various costs involved. A second negative is that some mortgages – but not many – include prepayment penalties.
Refinancing such loans within three years can mean a penalty equal to 1% or 2% of the remaining loan balance.
» MORE: See today’s refinance rates
When Can I Refinance?
Different loan programs have different times before a borrower can refinance, what lenders call “seasoning.” The purpose of seasoning requirements is to assure that the borrower is making full and timely payments on the existing loan.
How quickly you can refinance also depends on the purpose of the transaction. Rate-and-term refinances are generally quick and easy because monthly loan costs are going down and that means less risk for the lender.
With a cash-out refinance, lenders will want a closer look at the borrower’s finances and longer seasoning periods frequently apply.
Conforming Mortgages and Wait Times
A “conforming” mortgage is a loan that lenders can sell to Fannie Mae or Freddie Mac. With a streamline refinance there is typically no seasoning requirement.
With a cash-out refinance there’s a 12-month seasoning requirement.
Refinancing and FHA Mortgage Seasoning
The huge FHA program is an insurance plan that’s popular with first-time borrowers and those needing liberal credit standards. Borrowers can purchase real estate with as little as 3.5% down under the FHA program because the government guarantees to fully repay the lender.
FHA borrowers can get a streamline rate-and-term refinance after they’ve made at least six monthly payments and seven months (210 days) have passed since closing.
With a cash-out refinance the property must have been owned and occupied by at least one borrower as their principal residence for 12 months.
“If the property is a manufactured home,” adds HUD, “it must have been permanently installed on a site for more than 12 months prior to case number assignment.”
With USDA loans, financing guaranteed by the Department of Agriculture, the general requirement is that the borrower must have 12 monthly payments before a loan can be refinanced under the program. A new appraisal is usually not required nor are credit reports or home inspections.
There must be a $50 monthly savings as a result of the new loan.
Refinancing with a VA Mortgage
The VA program has helped millions of borrowers with qualifying military service obtain mortgages with nothing down. To refinance, the VA program requires that six consecutive monthly payments were made with the original financing and that at least 210 days have passed since the current loan was originated.
For example: A VA mortgage closed on March 8, 2022. The first payment was due May 1, 2022.
If the Veteran makes six consecutive monthly payments, the loan will be seasoned on November 27, 2022, and can be refinanced after that date.
Special Mortgage Seasoning Rules
Mortgage lending involves a lot of complications and that’s true with seasoning requirements.
For instance, seasoning requirements may not apply to inheritances, divorces, separations, or the end of a domestic partnership. Loans will have to be current before refinancing.
Late or missed payments can affect seasoning requirements. And, of course, lenders may look at such benchmarks as loan-to-value (LTV) and debt-to-income (DTI) ratios as well as credit scores before refinancing a property, especially when a cash-out refinance is involved.
Whether now is the right time to refinance depends on your preferences and personal finances. The good news is that you’ve applied for a mortgage before and been successful.
And now – with today’s new technologies – you’ll likely find that if you want to refinance the process is quicker and easier.