How to refinance your mortgage

What is the first step in refinancing your home?

Getting started with a refinance is easy. To get started, there are two basic steps.

First, decide what you want to accomplish by refinancing. Is it a lower rate and payment, cash back, shorter loan term, or some other goal? Then contact a mortgage lender. The lender will ask you to complete a basic pre-approval application to show you if you qualify and what type of loan will meet your goals.

From there, all you have to do is find your best interest rate and fill out an application.

Ready to start?

Check your eligibility for refinancing. Start Here (February 5, 2022)

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How does mortgage refinancing work?

When you refinance a home loan, you are exchanging your old loan for a new one. The new loan usually has a lower interest rate and a more affordable payment. The lender financing your refinance pays off your old mortgage, effectively replacing it with the refinance loan and leaving you with a new monthly mortgage payment.

“Even though it involves most of the same steps as buying a property, refinancing is generally less complicated,” says Lyle Solomon, a consumer credit attorney and financial expert in California.

He continues: “It is difficult to say how long it will take, but the average time is 30 to 45 days. With a refi, you must meet the lender’s criteria, just like you did for the original loan.

This involves deciding what type of loan you want, applying for a loan and submitting financial documents, locking in your interest rate, waiting for underwriting, and closing the loan.

Here’s what to expect at each stage of the refinance process.

Connect with a lender to start your refinance (February 5, 2022)

How to refinance in five steps

1. Decide on the type of loan and the term of the loan

You will first need to decide what type of refinance you want based on your end goals. There are a variety of options for loan type, loan program, and loan term.

For example, you can choose a cash refinance if you want to get cash out of your principal or a rate and term refinance if all you’re looking for is a lower interest rate and monthly payment.

If your current mortgage is an FHA, VA, or USDA loan, you can also use a Streamline refinance program. Simplified loans are generally faster and cheaper, with limited documentation and no appraisal required.

When it comes to rates and terms, you can opt for a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM). And you can choose a new loan that lengthens or shortens the term, depending on your needs. For example, you can switch from a 30-year mortgage to a 15-year mortgage or vice–versa.

2. Apply to different lenders

It often doesn’t make financial sense to refinance unless you can lower your interest rate. This requires shopping around carefully and requesting quotes from multiple lenders, including your current lender if desired.

To get loan offers and quotes, you will need to complete a pre-approval loan application, submit documents and provide information, including:

• Personal details
• Personal identifier like a driver’s license or social security number
• Details of the property you are refinancing
• 2 to 3 months of bank statements
• Statements of retirement accounts, investments and other assets
• Forms W–2 or 1099 (for self-employed borrowers)
• Recent payslips

“You have the option of receiving as many mortgage refinance quotes as you want. Fortunately, the internet makes it easy to get quotes from various refinance providers,” says Solomon.

“To get the best deal, you need to get multiple quotes to choose from,” he continues.

You can even use a low rate quote or low fee estimate to negotiate refinance costs between lenders.

In addition to receiving rate quotes, you’ll get loan estimates from each lender after you start applying. A loan estimate is a standard document that details all fees and charges related to your loan.

“Compare them carefully, line by line and dollar by dollar. Fortunately, loan estimates are simple and easy to understand, and the format is the same for all lenders,” says Solomon.

“Your loan details, along with your estimated interest rate, monthly principal and interest payment, and payments due over the life of the loan will be displayed on the first page,” he says. This makes it easy to compare offers side by side and find the best refinance offer.

3. Lock in your interest rate

You don’t have to lock in your interest rate right after you apply. But in a rising interest rate environment, it often makes sense to lock in as soon as possible in case rates rise before your close.

“Often, borrowers lock in their interest rate after they’ve been approved so the rate doesn’t change until the loan closes,” Solomon says. “A rate lock period can vary from 15 to 60 days, depending on your lender, your region and the type of loan. If your loan doesn’t close before the rate lock period expires, you can extend it, which may incur additional fees.

Or, you may be able to lower your rate. This means you can now lock in at a pre-determined rate, but if rates go down during the lock period, you can get that lower rate instead.

4. Enter the subscription phase

Your lender will begin the underwriting process after submitting your application. Underwriting involves analyzing your financial information and verifying that each document and piece of information you have provided is accurate, thereby establishing your creditworthiness. Signing up can take anywhere from a few days to a few weeks, depending on many different factors.

The underwriting stage usually includes obtaining an appraisal of the home. This involves having a professional appraiser, chosen by the lender but paid by you, carefully appraise your home to determine its exact current value.

“His [generally] necessary to have an appraisal before being approved for your refinance. However, the appraisal may be waived if you have an FHA, VA or USDA loan or if your property has recently been appraised,” says Warner Quiroga, Realtor and President and Owner of Prestige Home Buyers.

However, an appraisal waiver is only possible if the home’s value is $1,000,000 or less, says Jon Meyer, Mortgage Reports’ loan expert and licensed MLO.

The appraiser may need to enter your home to perform the appraisal. For best results, make minor repairs and clean and prep your home before the appraisal.

5. Complete your new loan

Once the underwriting is complete to the satisfaction of the lender, your loan will be approved and you can proceed to the closing stage. This is when your new loan is finalized, all documents are signed, and the refinance process is complete.

“Your lender will give you a closing disclosure document a few days before closing, providing you with all of the final figures for your loan,” Solomon continues. “Fortunately, a refinance closing takes less time than a home purchase closing. The only people who need to attend are anyone listed on the loan or title and a representative of the lender or securities.

On your closing date, at the closing location specified by your lender, you will review your loan details and sign your loan documentation. At this point, any closing costs that are not included in your loan will need to be paid. If you withdraw money, this is when you will receive the funds.

Connect with a lender to start your refinance (February 5, 2022)

How to prepare before refinancing

The above five steps are required to complete a refinance. But there’s one thing you’ll want to do before you start the process: take a close look at your personal finances.

Your credit score will affect your refinance rate and your eligibility. So take the time to check your credit reports and credit score before shopping around for lenders. And work to improve your score and clean up any errors or inconsistencies you see on your credit reports.

Also, before refinancing:

• Avoid making major purchases
• Avoid opening new accounts or lines of credit before applying
• Pay all your bills on time
• Repay small existing debts if possible

These measures will prevent your credit score from dropping before you apply. And if you can boost your score by a few points, it could net you a lower interest rate and bigger savings on your new mortgage.

“The better your financial situation before you refinance, the more likely you are to receive an ultra-low rate,” suggests Solomon.

When to refinance your home loan

“There are a few instances where it makes sense to refinance your mortgage,” says Matt Hackett, chief operating officer for Equity Now in New York.

“The first is when market interest rates are lower than the rate you are paying on your current mortgage. Refinancing at a lower interest rate can lower your monthly mortgage payment and total interest paid over the life of the loan, making home ownership more affordable,” says Hackett.

Another good reason to refinance is to convert the equity in your home into cash through a cash refinance.

The proceeds can be used to pay off high-interest debt, fund a home improvement project, start a new business, or pay a large expense like medical bills. In fact, there’s no limit to what you can do with the funds from a cash refinance, although some uses are better than others.

Other common reasons to refinance include:

• Lower the terms of your loan, say from a 30-year mortgage to a 15-year mortgage, so you can pay off your debt sooner and save thousands of dollars on mortgage interest
• Switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage to avoid rising rates and higher monthly mortgage payments
• Removal of private mortgage insurance that may be required on your current loan. For example, if you have an FHA loan on which you initialized 3.5%, you must pay mortgage insurance for the life of the loan, unless you are refinancing

Check your eligibility for refinancing

The first step in refinancing a mortgage is to establish your financial goals and verify your eligibility with a lender.

If you’re ready to get started, you can do it here.

Show me today’s rates (February 5, 2022)