How Soon Can I Refinance?

Home values are on the rise. This increase in home prices has an impact on people working in all corners of the real estate industry.

Rising prices impact buyers, seller, and real estate agents, who stand to earn more on commissions when a house is sold for a higher price. It impacts mortgage professionals, housing developers, renters, landlords, and any one else even loosely or indirectly associated with real estate.

One rather surprising impact from rising prices comes when you want to refinance your mortgage. You might think that only active buyers and current sellers would be impacted by the rising price, but current homeowners, with no intention to buy or sell, can also be effected. Because cash-out refinancing could be more beneficial thanks to rising prices.

As we will describe, the availability of cash-out refinancing is often based on the value of your home compared to how much you owe on the current mortgage. You need to have a certain level of “equity” (the amount you own, usually at least 20% is needed), so rising home prices could actually mean more available cash-out refinancing for current homeowners.


How Rising Home Prices Impact a Cash-Out Refinance?

To help you understand why home value has an impact on available cash-out refinancing, we’ll give an extremely simplified example, one that, for the sake of simplicity, ignores a variety of other factors and only focuses on the value of your home and your initial downpayment.

Suppose you have a home that was valued at $500,000 when you made the purchase. You used a 15% downpayment ($75,000), which means you borrowed $425,000. At the beginning of your purchase, the mortgage balance (the amount you owe) of $425,000 on a home valued at $500,000. This means you have 15% equity.

Now let’s suppose that after two years, you still had the same balance on your mortgage of $425,000. (Which is almost impossible as payments would steadily reduce the balance. Again, we’re simplifying.)

However, over these three years, your home went up in value by 20%, a large increase, but not unheard of. This means that your home went up in value by $100,000, and now has a total value of $600,000.

Now you have a mortgage balance of $425,000 on a home valued at $600,000. This means you now have equity just shy of 30%.

By simply letting your home appreciate in value, you have practically doubled your equity. 

This matters because cash-out refinancing is based on equity. 15% equity, which you started with in the above example, is not enough to qualify for refinancing. But 30% is enough for most refinance products, including cash-out refinancing. By simply doing nothing and letting your home grow in value, you have more potential to use cash-out refinancing.

Current Low Rates Make Refinancing Even More Attractive

Climbing home values are not the only reason why cash-out refinancing is so popular. It’s an ideal time to refinance in general (cash-out or not), so many people are choosing to drop higher interest rates from previous loans and take advantage of lower rates.

If you took out a mortgage loan five, ten, or fifteen years ago, there’s a good chance that you can save hundreds, possibly thousands of dollars by refinancing. So not only can you get cash that can be used for various purposes, you can (probably) do so with an interest rate that is lower than your current rate.

Nothing is guaranteed, but with a significant reduction in interest it may even be possible to get cash out and secure a lower monthly payment. (This would require that you get a major reduction and only take a small amount in cash.)


Low Market Inventory Increases Need for Cash-Out Refinancing

One of the top motivations for cash-out refinancing is to secure cash that can be used for home repairs and remodeling. A new roof, a remodeled kitchen, the installation of a solar-energy system; all of these projects cost thousands of dollars, and many homeowners don’t have this cash sitting around.

Because housing inventory is currently low, many people simply can’t find a new home that fits their needs. Therefore, instead of purchasing a new property, they may instead choose to remodel and rework their own homes. Cash-out refinancing could be a way to finance these changes.


How Soon Can I Refinance?

If you want to take advantage of low interest rates, you’ll usually have to wait about six months, in some cases a year, to use this option. The specific details, however, will vary depending on the type of loan you use.

For the majority of loan products, you will need to have 20% equity or higher in your home, so if you used a small downpayment, regardless of home value increases, you likely won’t qualify within the first year. But it never hurts to talk with a lending professional to find out.


Rules for Conventional Loans

People with conventional loans, which are supported by either Fannie Mae or Freddie Mac, may be able to refinance almost immediately after closing on the initial purchase. However, many lenders, who also have a say in whether or not you can refinance, have a six-month waiting period before you can refinance with them. You may have to wait if you want to refinance even if it is allowed by Fannie Mae or Freddie Mac.

However, there are options. Just because you used a specific lender on the original loan does not mean you have to use that company on the refinance. You’ll also want to check with your current lender to make sure there are no prepayment penalties.


Rules for FHA, VA, and USDA Loans

Although there are differences, most government-supported loan programs have more or less the same rules for cash-out refinancing. With government loans, you’ll likely have to wait about 6 or 7 months if you want to go from one loan into a similar loan. For example, if you want to go from an FHA loan into a new FHA loan, you’ll have to wait about half a year.

Of course, typical requirements, such as timely payments and no foreclosures, apply to these loans as well.

If you want more information about cash-out refinancing and whether you are currently eligible, contact our team today!