Refinancing a mortgage is the process in which a consumer chooses to restructure the debt for his home loan for either a lower interest rate, lower payments or to get cash out of equity. Refinancing is common as more consumers find that in a competitive marketplace better deals can be found by researching. When it comes to refinancing, timing is of critical importance -- including when you signed your last loan.
The earliest you can refinance your home loan is immediately after your initial loan is funded. Many states require a rescission period on home loans, which is a three-day "cooling off" period during which the customer can cancel the loan. Once this period expires and the mortgage company either funds the home loan or pays off the existing mortgage company, you are free to seek refinancing options elsewhere or with the same company.
According to Bankrate.com, it is most advantageous to refinance only once during your life in a house. The market will always fluctuate -- both in your favor and against -- so locking in a low, fixed refinance mortgage rate (particularly if you plan to spend a long life in the house) is always a good idea. Knowing when to strike when the iron is hot, however, is a bit more difficult. You must keep your eye on the prime rate, economic conditions and your own credit and financial situation.
One of the most important factors to consider before refinancing is whether your current loan has a prepayment penalty. Some mortgage companies attach a rider to their home loans that require a penalty be paid if the loan is paid off earlier than scheduled. In some cases these penalties will not expire for one, three or even five years after the loan closes. Therefore, if you choose to refinance right after you close on your house, make sure there is not a prepayment penalty attached to the original home loan.
It is also possible, given difficult economic conditions, that the value of your home is less than what you owe on your mortgage. In this case, your refinancing options will shrink, no matter how strong your credit is or how long ago you took out your loan. However, there are some options available to refinance an "underwater" mortgage. One of the more popular options for homeowners in this difficult position is the Making Home Affordable program, sponsored by the Federal Housing Authority, which helps consumers who have mortgages with balances that are at least 15 percent higher than their estimated property value. This program has also been extended into 2015 to continue to help homeowners with underwater mortgages.
- Bankrate.com: 4 Things to Know Before You Refinance
- Bankrate.com: When to Refinance Your Mortgage
- Freddie Mac: Prepayment Penalty Mortgages
- Department of Housing and Urban Development: HUD Streamline Your Mortgage
- FHA: FHA Offers New Refinancing Program for "Underwater" Mortgage Holders
- Debt.org. "Mortgage Re-Fi." Accessed Aug. 30, 2020.
- Board of Governors of the Federal Reserve System. "Interest-Only Mortgage Payments and Payment-Option ARMs — Are They for You?" Page 12. Accessed Aug. 30, 2020.
- Board of Governors of the Federal Reserve System. "A Consumer's Guide to Mortgage Refinancings." Accessed Aug. 30, 2020.
Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.