1. First off there should only be one or two reasons why you would even want to refinance a home after closing on a home. The only time it makes sense to refinance in such a short time period after closing would be to take cash out of the home. Good luck doing it though. You will only be able to get approved on a new home loan is if the home was given to you in a will or a gift of equity (which is when a parent or relative gives you the house for 50% of what the value is).
2. Many parents will have paid off the house or owe little on it and decide to give the house to their kids to help them get started with their lives. Instead of charging the kids full price them give them a deal. Most will just sell them the house for what the parents owe on the mortgage. The kids will call up the mortgage company and tell them that they are getting a gift of equity from their parents. The mortgage company knows the house is worth more but when you get qualified on the loan you are getting qualified at 100% LTV (loan to value) of the house. When this happens the kids will be charged PMI (private mortgage insurance) on top of their mortgage payment.
3. Let’s say that the kids are getting the home with 50% equity in the home. What they want to do is take some cash out to pay off some credit cards, a car loan, and get enough cash out to help remodel their home. They already know what the home is going to be appraised at and they decide to take enough money to go up to 80% of the value of the home.
4. They call up the new mortgage company and tell them about their plan. The new mortgage company does not care that they just closed on the loan the day before. By doing the new home loan at 80% LTV (loan to value) it will eliminate the PMI from their monthly payment. They will probably see their overall payments drop by doing this and will now have more money month to month than they did before.
5. The one thing you do not want to do is tell whatever mortgage company you are going through that you plan to do this. Mortgage companies get paid two different ways. They get paid by collecting your interest that you pay or by selling your home loan on the secondary market. When banks sell your loan to another bank for a quick profit there is an agreement between the two that if the home owner sells or refinances their home four months after the loan is funded (usually three weeks after closing) than the mortgage company that originated the home loan must pay back the proceeds to the larger bank that bought the loan. This is called the “recapture period.”
6. If you tell the bank that you plan on doing this there is a chance that they will not even want to do the home loan for you in the first place because they know they are wasting time on you since you are going to use them to get the loan and more than likely go to another place to get the next mortgage soon. They will be forced to give the money back and their commission. Be expecting a call from an angry loan officer wondering why you are doing this. They will find out because once you get in process with the next company a pay off letter is sent to whoever holds the mortgage note.
7. Most loans done nowadays do not have what is called “seasoning” issues anymore. Most large mortgage companies like Quicken Loans, Countrywide, Chase, Bank Of America, and Wells Fargo have a normal conventional loan program that does not care when you bought the home. So if you were to have closed a loan with another company and call one of these guys you will be able to get your new loan using the true value of the home instead of what it was sold to you for from your parents. Seasoning is a term used by mortgage companies to determine when you bought the home. Some loan programs in the past had underwriting guidelines that required home owners trying to get approved on a loan that they had to be in their home for at least 6 months to a year.
8. The only home loans that you might have some trouble doing right after you closed on a home are jumbo loans and home equity lines of credit. Jumbo loans are riskier than conventional loans and are not backed by Fannie Mae. This makes mortgage companies a little more uneasy about refinancing them so quickly. With home equity loans there is mostly a 6 month waiting period before you can take one out. What the mortgage companies do is use what you bought the home for during that six months. So if you bought the home for $200k and put 20% down on it you could borrow up to 20% back from a line of credit (assuming you find a mortgage company doing second mortgages up to 100% LTV). Let’s say you got a deal on that home and its really worth $250k, to get the value you want you would still have to wait 6 months before the mortgage company recognizes that value. The only downside to having to refinance your home again is that you will ahve to pay closing costs again (there is no such thing as a no closing cost mortgage). Of course the mortgage company will roll the closing costs into your loan so you do not have to come out of pocket with any cash. Be careful with FHA loans. Some of them have a early termination clause where if you sell or refinance your home within a certain time period you have to pay them a fee.
9. For the most part you should not be calling up a mortgage company right after closing because you think you got a bad deal. All of the sub-prime mortgage companies have gone bankrupt and the companies left doing home loans do not do sub-prime loans at all anymore. Pre-payment penalties have been outlawed by the U.S Government and are illegal to do. No worry about that anymore. What you are going to find is that you are probably going to be offered a 30 year fixed interest rate mortgage from every place you call that has a best of market interest rate.
10. Be smart when you are trying to play this refinance game. If you know you are buying a fixer upper than do not put a large down payment on the home. Instead, keep the money and put down as little as possible to fix it up so hopefully the value of the home goes back up. When your done remodeling then try to refinance it so this way you do not get caught using credit cards to pay for things and find out you cannot refinance. Right now in the real estate market you are probably not going to be able to refinance at any time in the near future. The only people that will be able to refinance the day after closing their loan or within 6 months of closing are people that inherited a home through a will or were given a gift of equity from family members. Home prices are dropping around the country by 12% a year so do not think that you can refinance your home loan. More than likely if you only have a little bit of equity now it will be gone in a year and the mortgage companies will not be able to refinance you because you owe more than what your house is worth.