Finding yourself in need of refinancing directly after closing on a mortgage for your house can happen for a variety of reasons. You may have experienced an emergency that requires you to take cash from your equity or down payment. Alternatively, if the interest rates dropped, you can save money by refinancing with more favorable terms. Perhaps you would like to remove a co-signer or add another person to your note. Regardless of the reason, you should consider important factors before you refinance.
There is no law to prevent you from refinancing your loan as soon as you close a mortgage on your house. However, that doesn't mean that it's always a good idea to do so. Even though you are legally able to refinance right away, your mortgage note may contain clauses that delay you from doing so. Lenders make money from the interest charged over the course of your loan. Therefore, provisions in your mortgage may be written in such a way as to prevent you from refinancing with another lender too soon.
Some mortgages specify prepayment penalties if you refinance before a certain amount of time, such as six months or one year. The cost can range from a percentage of the loan amount to a few months of interest payments. This can reduce the benefit of refinancing. If you wrap the penalty into the new loan, then you have increased the principal balance that you will be paying off for up to 30 years. Sometimes loans specify that the prepayment penalty does not apply if you sell your home.
If you want to refinance to draw cash out of your equity to remodel, consolidate bills or for some other reason, you may have to wait. When the real estate market is rising quickly, you can take advantage of the equity in your home right away. However, if home prices are stabilized or decreasing, you will have to wait to refinance until other similar homes in your area sell for more than what you paid. If you want the best refinance rate, then you shouldn't borrow more than 80 percent of the value of your home. Therefore, when you think your equity is more than 20 percent, it may be time to shop around for a new loan.
Even though you may be able to refinance your mortgage as soon as you close your loan, it may not be financially wise to do so. Unless you purchase a no-cost loan, which may carry a higher interest rate or wrap fees into the new loan, there will be an expense when you refinance. You can pay fees for the appraisal (which may be waived if there is a recent one on file), origination fee, discount points, escrow charges and prepaid insurance and taxes, as an example of the costs involved with refinancing.
- new home for sale image by itsallgood from Fotolia.com