You can refinance your house at any time if you have enough equity. But refinancing at any time involves costs. So, you should make sure it’s a good idea for you. There are good and bad reasons. You need a good reason. And then weigh the benefits against the costs.
- Reducing payments or loan term are good reasons.
- Spending more money that you don’t have is a bad reason.
If you think about it all reasons fall into one of these two categories. So, if you are going to spend more money you should think carefully before you take on more debt. Even if it seems like a good decision, most of the time it isn’t.
Refinance Shortly After Closing
You can refinance your mortgage soon after you close. There are some good reasons. But be careful if you aren’t lowering your payments or reducing the term of the loan.1
Secure Lower Interest Rate
You may have an opportunity to refinance for a lower interest rate. Any time you can lower your interest rate is a good time to think about refinancing. But this is only a good idea if the rate is low enough.
- If the rate is at least 2% lower than your existing rate
- If it lowers your rate by less than 2% make sure that the fees won’t negate the benefits of the rate reduction
It is rare for the market to move 2 points or more. So, when it does happen you should consider restructuring. Some banks will try to convince you it is a good idea to restructure for a difference of 1% or less. Be careful because you will pay closing costs of about 2% – 4% of the value of the loan. For a $200,000 loan that can be as much as %12,000. So, your new loan might end up costing you more money.
It may make sense to consolidate debt shortly after closing if your have some surprise bills. And many people consolidate debt this way. But this can be a slippery slope.
- Make a spending plan to ensure you won’t spend your way into more debt
- Don’t take out more money than you need to pay your existing high
Refinancing to consolidate debt sounds like a good idea. But it can, and is, a slippery slope for many people, because they don’t change the spending patterns that got them in financial trouble. This is only a good idea if you will stick to a plan that will keep you from spending your way into trouble again.
Another good reason to refinance is to shorten the term of your loan. If you get a lower interest rate you can get a loan for a similar monthly payment but significantly reduce the term.
- You may pay a shorter term for a similar payment if interest rates drop
- You may pay for a shorter term for an increased payment if your willing to pay more each month
If interest rates do not fall significantly you will be better off not refinancing. Because you can simply make higher payments and put them toward the principal of the loan.
Closing costs have a big impact on how soon you can refinance. The costs are like the fees you paid when you took out your current loan. This is because most of your closing costs are associated with your loan.
Typical Closing Costs
Whenever you refinance your house there will be costs. It doesn’t matter whether you do it soon after you buy your house or later. Typical fees for a refinance can be divided into two categories.
- Non-recurring costs include the application fee, loan origination, home appraisal, document fees, title search, flood certification, home inspection, attorney fees, and survey
- Recurring costs include loan premium, taxes, and insurance
So, these don’t depend on the timing. But typical fees always include similar payments as your original mortgage. And these costs will usually run about 2% – 4% of your balance.2
No Closing Costs
Don’t let the idea of a no closing cost closing fool you into refinancing too soon. You can refinance your mortgage with no out of pocket expenses. But you will have to pay closing costs. And the lender will recoup the costs one of two ways.
- The lender charges a higher interest rate
- The lender rolls the fees into the principal of the loan
Even though they may call it a no cost refinance, your lender will always charge you closing costs.2