Why its Easier to Refinance than Purchase
Refinancing your home mortgage loan has always been easier to do than obtaining a home purchase loan. Borrowers often see refinance loans as any other. If borrowers took a closer look, they'd realize there are valid justifications for this precedent.
Seasoning is an important term in the mortgage and real estate loan industry, and most important with mortgage refinance loans. "Seasoning" a loan means that the borrower has had time to show they can make the payments on-time for an extended period of time. A new home purchase vis-à-vis payment seasoning, is something that a new home purchaser cannot offer to a lender as a form of security. Not only is the seasoning of a mortgage a factor in risk assessment, so is built up equity. Equity is the accumulated ownership stake one attains as property values increase and after mortgage payments have been made for an extended period of time.
It’s usually the case that over dinner, people will talk mortgages. Dad tells his Son that he refinanced and got a 5.25% rate with very little paperwork. Son feels bad because he just bought a house with a rate of 6.125% and lots of paperwork. I don't really recommend these kinds of conversations unless the family is filled with CPA's and can read through numbers. Even if everyone did tell the truth about their rate, all too often the details are so different that no one at the table can fairly compare mortgage rates. What are credit scores? How many points did you pay? How much were the fees? Was there a prepayment penalty? How much money is in the savings account? In essence how financially fit are you compared to others? All very personal questions and difficult to disclose with total candor.
Dad and Son take for granted that Dad has lived in his home for twenty years and has amassed a load of equity and payment seasoning. Son doesn't inform Dad that he did a zero down loan with not much savings to offset the risk.
If you are Son, then you probably got a good loan for your particular situation. My recommendation would be for you to pay the loan on time for at least a year and look to refinance down the road. By then you will have acquired some seasoning on the payment and some additional equity in the property. Banks appreciate seasoning and equity, and will reward you for it. Who knows, maybe you can beat Dads rate if the market is just right. Don't brag to him though, you might not get the biggest burger at the next barbeque.
