Mortgage companies cannot prohibit a homeowner from refinancing a mortgage. However, mortgage companies can make it costly for a homeowner to refinance before a certain time period expires. The homeowner should understand all of the costs and benefits of refinancing before signing any loan paperwork. Qualifying for refinance mortgage is virtually the same as qualifying for the loan to purchase a house. However, there are some things to think about if refinancing only a year after purchasing a home.
Some loans require a prepayment penalty if a homeowner tries to sell the house or refinance a mortgage within a certain number of years. Major mortgage lenders and insurers, including Fannie Mae, Freddie Mac, Federal Housing Administration and Veterans Affairs to not require a prepayment penalty if their loan is paid off early. On these types of loans, the homeowner can refinance the loan the next day if they chose if no penalty. If the homeowner has a loan with a prepayment penalty, he should understand how much the prepayment penalty costs (often thousands or tens of thousands of dollars) and how long you must wait before the prepayment penalty expires.
Cost of Refinancing
Obtaining a mortgage is expensive. Mortgage lenders charge the homeowner thousands of dollars to obtain a new loan for their home. It’s likely the homeowner just paid the costs of obtaining a loan when the current loan closed a year ago. Repaying those closing costs is likely to take away any equity by the property over the past year. Even if the new lender allows the homeowner to finance the closing costs, it is still money the homeowner will not receive when she sells the home.
If the home appreciated enough that the loans balance is no longer more than 80 percent of the property’s value, refinancing can provide substantial savings. Conventional mortgages do not require mortgage insurance if the home has a least 20 percent equity. Sometimes mortgage insurance costs hundreds of dollars a month, and removing this payment along with a significant drop of interest rate and payment on the new loan could provide enough benefit to refinance after only 12 months.
Analyze the Benefits
To determine if refinancing after only a year is wise, the homeowner has to make a couple of calculations. The homeowner should subtract the new payment from the current payment and then divide the cost of obtaining a new mortgage by the savings it provides each month. If the loan has a prepayment penalty, then the homeowner must include the prepayment penalty in the cost to obtain a mortgage. Ideally, the homeowner will save enough money to pay for the refinance within 24 to 36 months. If it doesn’t, the homeowner may wish to wait for a lower interest rate to provide enough savings to make the refinance worthwhile.
- Federal Reserve: A Consumer's Guide to Mortgage Refinancings
- Consumer Financial Protection Bureau. "What Is a Prepayment Penalty?" Accessed Sept. 15, 2020.
- Federal Register. "Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)." Accessed Sept. 15, 2020.
- Consumer Financial Protection Bureau. "Student Loan Affordability." Page 21. Accessed Sept. 15, 2020.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.