Looking to refinance your home?
Mortgage rates are still at historic lows, and over 12 million homeowners could benefit from a refinance in today’s environment.
But just how does refinancing your home work?
Luckily, the refinance process is relatively simple. It’s easy to explore your options and apply for a new home loan.
With a clear understanding of the refinance process, you’ll be better equipped to get approved and find the best deal. Here’s how to get started.
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Step 1: Set your refinance goals
The first step in the refinance process is to set a clear goal. Figure out what benefits you want from a mortgage refinance, and what type of loan will help you get there.
There are a number of reasons homeowners choose to refinance. For example:
- Are you trying to save money immediately by lowering your monthly payment?
- Are you looking to save money long-term by taking your 30-year loan down to 15-years?
- Do you want to remove private mortgage insurance (PMI) or FHA mortgage insurance?
- Do you want to cash out your home equity?
Taking out a new home loan can help you achieve any of these goals. But you have to choose the right refinance strategy for what you hope to accomplish.
There are three main types of refinance loans:
- Rate and term: Lower your interest rate, shorten your loan term, or perhaps both. You can reduce your monthly mortgage payment and save on interest over the life of the loan
- Cash-out: Tap into your home’s equity and use the cash for home improvements, debt consolidation, emergency funds, or any other purpose
- Rate conversion: Convert your adjustable-rate mortgage (ARM) to a fixed-rate mortgage to avoid any future increases in your rate or mortgage payment
You also have to choose which loan product you’ll use: conventional, jumbo, FHA, VA, or USDA.
Many homeowners stick with the same type of loan they currently have. But switching to a different loan type could have added benefits.
Your loan officer can help you understand your refinance options and choose the best loan for your financial situation.
Step 2: Get refinance rates from several lenders
Now that you’ve decided it makes sense to consider refinancing, it’s time to get your mortgage quotes. You’ll want to apply for pre-approval with a few different lenders to make sure you’re getting the best deal on your new loan.
Refinance rates can vary significantly from lender to lender. And a lower interest rate can mean significant savings — especially over the long haul.
But remember, there’s more to it than just the lowest rate.
Refinance closing costs are typically a few thousand dollars — just like when you bought your home. And the higher your upfront fees, the more they eat into your savings. So look for the lowest closing costs as well as the lowest interest rate.
Also keep in mind that different loan programs have different refinance rates. For example, VA rates, conventional rates, and FHA loan rates can all vary a lot.
Rates can change from day to day, too, so it helps to get your refinance quotes on the same day.
Step 3: Compare rates and fees
To ensure you’re getting the best possible deal, you should obtain multiple quotes from different lenders.
But, how do you even know if a lender is offering the best deal?
First, compare Loan Estimates.
The Loan Estimate is a standard three-page document provided by lenders. This form provides you with important information, including estimated interest rate, monthly payment, and total costs for the loan.
The Loan Estimate also provides additional important information that can be helpful when shopping and comparing refinance quotes.
For instance, on the second page of the Loan Estimate, you’ll be able to see and compare loan origination fees. These vary substantially from lender to lender, so shopping for the lowest origination fee can save you a lot of money upfront.
Another great tool for mortgage borrowers is located on page three.
In the Comparisons section, you can see and compare how much you’ll have paid in 5 years, how much of those payments will have gone towards principal versus interest, and you’ll also find your APR (annual percentage rate).
Finally, don’t forget to look at whether or not there are any prepayment penalties associated with your loan. Most mortgages today don’t have prepayment penalties, but check just to be sure.
Once you’ve compared your LEs side by side, you’ll have a much fuller understanding of which lender is truly offering the best deal on your new mortgage.
Step 4: Submit your documents
Now that you’ve chosen your lender and the type of refinance loan that best suits your needs, it’s time to complete your loan application and submit your documents.
This is an important part of the process as it can impact many different areas, such as the amount of time it takes to get your loan closed.
The amount of time to close your loan is significant for a number of reasons. Mainly — your rate lock. Not closing before your rate expires can result in costly extension fees.
Turning in all your documents on time helps ensure your loan will close in a timely manner.
The required documents to refinance typically include:
- Paystubs covering 30 days
- Bank statements from the last two months
- W2s and/or 1099s for past two years
- Tax returns for past two years
- Asset statements covering the most recent 60 days
- Proof of homeowners insurance
Other documents may be required depending on the type of loan for which you’re applying and the details surrounding your particular loan profile.
For example, someone who is self-employed will need to provide more documentation than someone who is a W2 wage earner. Someone who’s retired and receiving Social Security and/or pension will have other requirements, as well.
Additional documents may be necessary depending on your situation and the type of loan for which you are applying. Your lender will provide you with a complete list of the documents needed.
Step 5: Appraisal and underwriting
The next step in the refinance process is going through a home appraisal and underwriting.
Your lender will order a new home appraisal to verify your current home value. The underwriter will review your documents and offer conditional and/or final approval for your new loan.
Underwriting turn times can vary widely. Some lenders can underwrite a refinance loan in days, while others may take a few weeks.
The time underwriting takes depends on a lender’s current volume, the complexity of your application, and the availability of appraisers. An appraisal alone can often take one to two weeks.
As the borrower, this part of the refinance process is mostly a waiting game. But you can often shorten the approval time by providing all your documents right away and responding to additional requests as quickly as possible.
Step 6: Closing day
Closing on your refinance is the final step in the process. Well, almost.
When refinancing, you will encounter the “Right of Rescission.” This is a mandatory three-day waiting period before your loan will fund. It gives homeowners a small window in which they can cancel their refinance loan if they change their minds.
Provided you go ahead with your loan, you’ll have a closing day and sign final papers, just like on your first mortgage.
To ensure your closing day is as smooth as possible, consider the following steps:
- Stay in close contact with your lender in the days leading up to the closing. This can help make certain all necessary documents and financial arrangements for the mortgage are in place
- Be particularly careful not to apply for additional credit or use credit cards more than usual
- Underwriters typically check your credit report again just before settlement. Make certain to keep your credit profile as close as possible to how it was when you applied for you loan
These days, lenders are required to issue a Closing Disclosure (CD) within three days of closing.
The interest rate, terms, and closing costs on your CD should closely mirror the ones on your Loan Estimate.
Mortgage borrowers should compare the Loan Estimate and the Closing Disclosure for any errors. You’ll want to review these documents carefully with your lender.
The refinance process: FAQ
Refinancing involves replacing your current loan with a new one. When you refinance, you’ll apply for a new mortgage just like when you bought your home. Once approved, the funds from your new loan will be used to pay off your existing mortgage. This effectively replaces your old home loan with a fresh one — typically with a lower interest rate, lower monthly payment, or some other benefit.
Some lenders take longer than others to complete a refinance. Typically, banks and credit unions may take a bit longer than online lenders. Most lenders average anywhere from 30-45 days for a mortgage refinance.
You’ll have to meet certain criteria for mortgage refinancing. Steady income, a decent credit score, acceptable debt-to-income ratios, and at least some home equity will be necessary to refinance.
According to FICO, a hard inquiry from a lender will decrease your credit score by five points or less. If you have a strong credit history and no other credit issues, the impact may be even smaller. And the drop is temporary. Your scores will bounce back up again, usually within a few months, assuming everything else in your credit history remains positive. Fortunately, most credit scoring companies will count multiple inquires for mortgage loan as one if they are made within a certain period of time (14-30 days). So you can apply with a few different lenders without your credit being dinged multiple times.
The closing costs for refinancing a mortgage are similar to the costs associated with buying a home. Closing costs in the U.S. generally average between 2 and 5 percent of the loan amount. That’s $2,000 to $5,000 for every $100,000 you borrow. However, there are certain costs, such as owner’s title insurance, that you won’t incur when you refinance, making refi fees slightly lower than home buying fees.
Some refinance programs do not require appraisals. FHA Streamline Refinances and VA Interest Rate Reduction Refinance Loans (VA IRRRL) typically don’t require an appraisal. For most others, an appraisal will be necessary.
If you are approved for it, you can absolutely get cash back when you refinance. Typically, these types of loans are considered cash-out refinances. Rates and fees can sometimes be higher for these. Be sure and check with your lender if your goal is to get cash back.
The primary downside to any type of refinancing is the cost associated with the loan. Even a ‘no-closing-cost refinance’ still has expenses in the form of a higher interest rate or a bigger loan amount. The other downside to refinancing is that it starts your loan over. So if your home is almost paid off and you want to cash out your equity, you might prefer a home equity loan or home equity line of credit (HELOC) over a refinance.
In most cases, you can refinance as often as you want. However, some lenders look for a “seasoning” period between home loans, or a certain amount of time between appraisals. Typically, you will have to wait six months before you can refinance with the same lender.
If you’re happy with your current lender, that could be enough motivation to refinance with the same company. But, while the benefits of good customer service are important, you’ll still want to ensure your existing mortgage lender can meet your refinancing goals before moving forward. Check with a few other lenders before signing on to make sure your current lender is really offering the lowest rates and fees.
Should you refinance?
Thanks to continued low rates and significant home appreciation, millions of homeowners have ample incentive to refinance.
However, refinancing isn’t the right move for everyone. You need to make sure a new loan will truly benefit you — whether via a lower interest rate, cash-back, or some other perk.
Check your loan options with a lender. If you can save money in the long run, a refinance is likely the right move.