How to Refinance Your Mortgage

Refinancing your mortgage can be a strategic move to potentially save money, lower monthly payments, or adjust the terms of your home loan.

But there’s a lot to consider. 

What Does Refinance Your Mortgage Mean?

Refinancing a mortgage involves replacing an existing mortgage loan with a new one. A refinance allows you to restructure your mortgage by paying off your current loan with a new one. Homeowners typically refinance to secure a lower interest rate, reduce monthly payments, switch from an adjustable-rate mortgage to a fixed-rate loan, shorten the loan term, tap into home equity, or debt consolidation.

How to Refinance Your Mortgage

Refinancing your mortgage can be a smart financial move, but you need to know the essential steps and considerations before leaping.

Step 1: Assess Your Financial Situation

Before embarking on the refinancing process, evaluate your financial situation. By assessing your current financial situation, goals, and reasons for refinancing, you’ll be better prepared to proceed.

• Clarify your reasons: Why do you want to refinance? Is it to lower your monthly mortgage payments, reduce the mortgage interest rate, or tap into your home equity with a home equity loan or HELOC (home equity line of credit)? 
• Consider your financial goals: Assess your short-term and long-term goals. Does refinancing fit into these objectives and align with your overall financial plan?
• Check your credit score: Your credit score will factor into what kind of refinance rates and offers you receive, so it’s important to know and possibly improve your credit score before diving in. 
• Evaluate your home equity: What’s the current value of your home and the amount of equity you’ve built? These details will influence your refinancing options, particularly if you’re considering a cash-out refinance to tap into home equity.

Step 2: Gather Documentation

The next step is preparing the necessary documentation for your mortgage refinance application. Lenders require specific paperwork to evaluate your financial situation accurately, such as:

• Income verification: Recent pay stubs, W-2 forms, or income tax returns from the past two years. If you’re self-employed, you may need profit-and-loss statements or 1099 forms.
• Asset statements: Bank statements, as well as statements from investment portfolios, retirement accounts, and any other asses.
• Property information: Documents related to your property, such as property tax statements, homeowners insurance policy details, and any recent home appraisals or assessments.
• Original mortgage information: Paperwork that shows the current loan balance, interest rate, and the terms of your existing loan.
• Identification and other documents: Driver’s license, passport, and Social Security Number.

Step 3: Choose the Type of Mortgage Refinance You Want

Understanding your options will allow you to choose the most suitable type based on your financial objectives, equity position, and current mortgage terms. These include:

• Rate-and-term refinance: This type allows for changing interest rates, loan terms, or both without tapping into home equity. Borrowers commonly opt for rate-and-term refinancing to secure a lower interest rate, switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or shorten the loan term to pay off the loan faster.
• Cash-out refinance: In a cash-out refinance, homebuyers borrow more than their existing mortgage balance and receive the difference in cash. It allows you to tap into your home equity for various purposes, such as funding home improvements, consolidating high-interest debts, or covering significant expenses. Remember that a cash-out refinance can increase your loan amount and bring higher closing costs.
• Cash-in refinance: This type of refinancing allows you to bring additional funds to lower the loan amount or improve terms. Homeowners typically choose this option to secure a better interest rate or eliminate private mortgage insurance (PMI) by reaching a lower loan-to-value (LTV) ratio if they had less than a 20% down payment upfront when they took out the original loan.
• Streamline refinance: Streamline refinancing is available for specific government-based loans, such as FHA, VA, or USDA. It’s designed to simplify and expedite the refinancing process by reducing the documentation and underwriting requirements asked for with conventional loans.

Step 4: Research Lenders and Rates

Choosing the right lender and obtaining competitive rates is crucial when refinancing your mortgage. 

• Compare multiple lenders: Research and compare offerings from conventional mortgage lenders and alternative lenders, including banks, credit unions, online lenders, and mortgage brokers. Look beyond interest rates — consider closing costs, origination fees, customer service reputation, and loan terms.
• Review interest rates: Compare current interest rates across multiple lenders. Pay attention to the annual percentage rate (APR), which includes both the interest rate and fees, providing a more accurate representation of the new loan’s cost.
• Understand loan terms: Different lenders offer varying loan terms. 
• Prequalification or preapproval: Some lenders offer prequalification or preapproval processes, which can give you an idea of the loan amount and rates you may qualify for without a hard credit check.

Step 5: Apply

Once you’ve thoroughly researched lenders, assessed your finances, and determined the type of refinancing that aligns with your goals, it’s time to initiate the refinancing process. Here’s what this involves:

• Choose a mortgage lender: Select the lender with the most competitive rates and terms suitable for your refinancing objectives.
• Complete the application: Many lenders offer online applications. Complete this application accurately and thoroughly. Expect questions about your income, assets, employment history, and details about your current mortgage.
• Provide documentation: Submit the required documentation, including income verification, asset statements, property information, and identification documents.
• Credit check and appraisal: The lender will now conduct a credit check and possibly an appraisal to ascertain your home’s value. These assessments influence the loan approval and terms offered.
• Loan estimate: Once your application is processed, the lender will provide a loan estimate. Review this document carefully, as it outlines the estimated loan terms, closing costs, and other fees associated with the refinancing.
• Lock in the rate: If you’re satisfied with the terms and rates offered for your new mortgage, consider a rate lock. This means locking in the interest rate to secure it for a specified period, protecting you from potential rate increases.
• Underwriting and approval: The lender’s underwriting team reviews your application and verifies the information provided.
• Funding and disbursement: After you sign the documents, the lender disburses the funds. If you’re paying off an existing mortgage, the lender settles that loan with your current lender, and any remaining funds are distributed accordingly.

Refinancing your mortgage can be a powerful financial strategy, offering the potential for reduced monthly payments, lower interest rates, or the ability to tap into your home equity. You can confidently navigate the process by carefully assessing your financial situation, gathering the necessary documentation, understanding the types of refinancing options available, and researching lenders.