The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. Let's walk through each step of the refinance process.
1. Choose A Refinance Type
The first step is to review the types of refinance to find the option that works best for you. Many types of refinancing options exist, but here are some common ones borrowers consider:
Rate and term refinance: This refinance option allows you to change the interest rate and loan terms of your current mortgage. Your new loan could ultimately have more suitable terms for your financial situation.
Cash-out refinance: This type of refinance means taking out a new loan of a larger amount and receiving the difference between the two loan amounts in cash. You can use this cash toward home improvements, buying a second home and more.
Cash-in refinance: The borrower will contribute a lump sum toward their mortgage to increase equity and decrease the amount owed. This could result in a lower monthly payment and interest rate.
No-closing-cost refinance: The borrower rolls the closing costs into the principal of the new loan instead of paying them in cash upfront. This makes for a higher monthly payment, but reduces the cash required to close on the loan.
2. Choose A Lender
After you’ve chosen a refinance type, it’s time to choose a mortgage lender. You don’t have to refinance with your current lender. If you choose a different lender, that new lender pays off your current loan, ending your relationship with your old lender. Don’t be afraid to shop around and compare each lender’s current mortgage interest rates, availability and client satisfaction scores.
3. Gather Documents And Apply
When you apply to refinance, your lender asks for the same information you gave when you bought the home. They’ll review your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan.
Some documents your lender might need include the following:
Two most recent pay stubs
Two most recent W-2s
Two most recent bank statements
Your lender may also need your spouse’s documents if you’re married and in a community property state (regardless of whether your spouse is on the loan). You might be asked for more income documentation if you’re self-employed. It’s a good idea to have your tax returns from the last couple of years handy.
4. Lock In Your Interest Rate
After you get approved, you may be given the option to either lock your interest rate – so it doesn’t change before the loan closes – or float your rate. Each option is unique and has its own pros and cons:
Rate lock:Rate locks last 15 – 60 days. The rate lock period depends on a few factors like your location, loan type and lender. You may get a better rate by opting to lock for a shorter period because the lender doesn’t have to hedge against the market for as long. Be warned, though: If your loan doesn’t close before the lock period ends, you may need to extend the rate lock, which may cost money.
Float rate: You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This may allow you to get a lower rate, but it also puts you at risk of getting a higher rate because it fluctuates But if you’re happy with rates at the time you’re applying, it’s generally a good idea to lock your rate.
5. Go Through Underwriting
Once you submit your refinance loan application, your lender begins the underwriting process. During underwriting, your mortgage lender verifies your financial information and makes sure everything you’ve submitted is accurate.
Your lender will verify the details of the property, like when you bought your home. This step includes an appraisal to determine the home’s value. The refinance appraisal is a crucial part of the process because it determines what options are available to you.
If you’re refinancing to take cash out, for example, then the value of your home determines how much money you can get. If you’re trying to lower your mortgage payment, the value could impact whether you have enough home equity to get rid of private mortgage insurance (PMI) or be eligible for a certain loan option.
6. Get A Home Appraisal
Just like when you bought your home, you must get a refinance appraisal before you refinance. Your lender orders the appraisal, the appraiser visits your property, and you receive a professional opinion of your home’s value.
To prepare for the refinance appraisal, you’ll want to make sure your home looks its best. Tidy up and complete any minor repairs to leave a good impression. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.
How you’ll proceed after the appraisal depends on whether:
The appraisal matches the loan amount: If the home’s value is equal to or higher than the loan amount, it means that the underwriting is complete. Your lender will contact you with details of your closing.
The appraisal comes back low: If you get a low appraisal, the loan-to-value ratio (LTV) on your refinance could be too high to meet your lender’s requirements. You can choose to decrease the amount of money you want to get through the refinance, or you can cancel your application. Alternatively, you can do a cash-in refinance and bring cash to the table to get the terms under your current deal.
7. Close On Your New Loan
Once underwriting and the home appraisal are complete, it’s time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. It’ll contain all the final numbers for your loan.
The closing for a refinance is faster than the closing for a home purchase. The closing is attended by the people on the loan and title and a representative from the lender or title company.
At closing, you’ll go over the loan details and sign your loan documents. You’ll also pay any closing costs that aren’t rolled into your loan. If your lender owes you money (for example, if you’re doing a cash-out refinance), you’ll receive the funds after closing.
Once you’ve closed on your loan, you have a few days before you’re locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.
Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
Refinancing a home loan involves replacing your existing mortgage with a new one, typically to obtain terms that are more favorable or that fit your financial goals. The process of refinancing a mortgage is similar to the process you went through when you obtained your first mortgage loan.
Key Takeaways. A refinance occurs when the terms of an existing loan, such as interest rates, payment schedules, or other terms, are revised. Borrowers tend to refinance when interest rates fall. Refinancing involves the re-evaluation of a person or business's credit and repayment status.
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.
At the same time, refinancing can be a little complicated, especially if your credit score is less than ideal or you're not completely sure what to expect. When you refinance, it means you're essentially taking out a brand new loan on your property, often for the remainder that you owe (but not always).
Is refinancing worth it? If it frees up money in your monthly budget, reduces the overall cost of the loan or helps you achieve some other financial goal, refinancing can be well worth the work and money. “It's important to determine your break-even point,” says Linda Bell, senior writer for Bankrate.
Refinancing risk refers to the possibility that a borrower will not be able to replace an existing debt with new debt at a critical point in the future. Any company or individual can experience refinancing risk, either because their own credit quality has deteriorated or as a result of market conditions.
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The average closing costs on a refinance are approximately $5,000, but the size of your loan and the state and county where you live will play big roles in how much you pay.
In conclusion. Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months ...
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.
In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.
Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.
Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example real estate taxes or homeowners insurance); any remaining funds are paid to you.
Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
Refinancing doesn't reset the repayment term of your loan, but it does replace your current loan with a new loan. You may be able to choose from different offers for your new loan depending on your goals, including a longer or shorter repayment term.
If you lock in a lower interest rate, your monthly payments will be reduced. If you change the term of your loan (say, from 30 years to 15 years) your monthly payment amount will likely increase, but you'll make fewer interest payments throughout the life of your loan.
Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.
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