How Soon Can I Refinance After Buying a Home?

2 story brown home with 2 car garage

Your house isn’t just a home, but an investment in your future. The work you put into becoming a homeowner — especially if you’re a first-time homeowner — isn’t over after you buy, though. Sure, you can take some time to enjoy yourself and settle in. However, it’s important to keep in mind future plans and the money you need to save to make them a reality. These goals may include renovations, education costs, business ventures, family trips, and retirement. These goals may be harder to reach if you have a less-than-ideal mortgage. You shouldn’t let it drag you down — you have options. Let’s talk about how soon you can refinance after buying a home, and whether or not this option is right for you.

Consider the Time Remaining on Your Current Mortgage

When it comes to deciding whether or not you should refinance after buying a home, consider the following.

How much of your premium have you paid already?

Most lenders ask you to pay far more toward your interest charges than your premium in the first years of your loan. This is to achieve consistent payments, and it makes sense. Obviously, any money you pay toward interest offers no benefits if you’re looking to refinance. This essentially adds up to wasted money. Early refinancing after buying a home makes more sense in this case.

Are you willing to go into debt or stay there? 

Consider again the length of your mortgage term. Thirty-year terms are traditional. Lenders offer other periods, but shorter terms will come with higher payments. What can these higher payments lead to? Well, they may negate any cost reduction that comes with refinancing.

For example, if you’re refinancing a 30-year mortgage after five years of payments and take a new 30-year mortgage, then you’ve ultimately added five years to your time in debt. While some might be happy to trade that for lower monthly payments, others may wish to be free from debt earlier, making late refinancing the less appealing option.

Understand Pitfalls: Closing Costs and Penalties

Mortgages also often come with two pitfalls that make a potential plan to refinance after buying a home not a good idea. What are these two pitfalls? Closing costs and prepayment penalty clauses. 

Unfortunately, paying closing costs after refinancing is typically unavoidable. Whether or not you should refinance at a given time depends on whether you will break even after paying those closing costs. In most cases, refinancing will still be worth paying these fees.

What are penalties, and how do I incur them?

More importantly, some mortgages come with prepayment penalty clauses. These can be quite punishing for homeowners looking to quickly refinance after buying a home. These fees ask homeowners to pay a certain percentage of their premium as a penalty for paying the full loan too early, often within a year, in order to discourage early refinancing. So, to save money through refinancing, you should at least wait until these penalties have expired, if not avoid signing mortgages with prepayment penalty clauses altogether.

When should I sign a new mortgage rather than refinance?

Once you decide to refinance after buying a home, be sure to diligently shop lenders and compare offers. We also recommend that you check with your current lender first, as many will be eager to offer you a better deal to keep your business. You should also convene with all your local banks, credit unions, and mortgage brokers before you sign a new mortgage. Ask around to friends, family, co-workers, or your realtor. Then, do your best to lock your rate when it hits a good low, and enjoy those lower monthly payments.

Let’s Recap What You Need to Know About Refinancing

Throughout the entire home buying process, as well as whether or not you should refinance after buying a home, it’s important to:

  • Check with your current lender first: Many will be eager to offer you a better deal to keep your business.
  • Consider your interest payments: Lenders want you to pay consistently. However, early refinancing makes sense if you can limit interest payments. 
  • Get real about debt and your budget: Higher monthly payments now will ultimately result in less time in debt later.
  • Check with all your local banks, credit unions, and mortgage brokers: Do this before you sign a new mortgage.
  • Lock your rate when it hits a good low: Enjoy those lower monthly payments and keep saving to make your dreams possible!

If you’re thinking of buying or searching for a new home rather than refinancing, check out our powerful and convenient home search tool. We’ve had the privilege of serving you in Knoxville’s real estate market for years, and we’re happy to help you secure the home of your dreams.

This post was originally published on June 20, 2017, but was updated on April 7, 2020

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