What is the first step in refinancing your home?
It’s easy to get started with a refinance. To begin, there are two basic steps.
First, decide what you want to accomplish by refinancing. Is it a lower rate and payment, cash back, a shorter loan term, or another goal? Next, reach out to a mortgage lender. The lender will have you fill out a basic preapproval application to show you whether you’re eligible and what type of loan will meet your goals.
From there, it’s just a matter of shopping for your best interest rate and completing an application.
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How does refinancing a mortgage work?
When you refinance a home loan, you’re swapping out your old loan for a new one. The new loan usually has a lower interest rate and more affordable payment. The lender funding your refinance pays off your older 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 stages as purchasing a property, refinancing is typically less complicated,” says Lyle Solomon, a consumer finance attorney and financial expert in California.
He continues, “It’s difficult to say how long it will take, but the average time frame is 30 to 45 days. With a refi, you must satisfy the lender’s criteria, just as you did for the initial loan.”
That involves deciding on the type of loan you want, applying for a loan and submitting financial documents, locking your interest rate, waiting for underwriting, and closing the loan.
Here’s what to expect at each stage of the refinance process.
How to refinance in five steps
1. Decide on the loan type and loan term
You’ll first have 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 instance, you might choose a cash-out refinance if you want to pull cash from your equity 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 could also use a Streamline Refinance program. Streamline loans are typically 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 could switch from a 30-year mortgage to a 15-year loan or vice-versa.
2. Apply with different lenders
It often does not make good financial sense to refinance unless you can lower your interest rate. That requires shopping around carefully and requesting rate quotes from several lenders, including your current lender if you so choose.
To get loan offers and rate quotes, you’ll need to complete a preapproval loan application, submit documents, and provide information, including:
- Personal contact information
- Personal ID like a driver’s license or Social Security number
- Details about the property you’re refinancing
- 2–3 months’ worth of bank statements
- Statements for retirement accounts, investments, and other assets
- W–2 or 1099 forms (for self–employed borrowers)
- Recent pay stubs
“You have the option of receiving as many refinance mortgage quotes as you desire. Fortunately, the Internet makes getting estimates from various refinance providers simple,” says Solomon.
“To get the best deal, you need to get several quotes that you can 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 the fees and charges related to your loan.
“Compare these 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,” Solomon explains.
“Your loan specifics, as well as your estimated interest rate, monthly principal and interest payment, and due payments over the term 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 deal.
3. Lock your interest rate
You don’t have to lock your interest rate right after you apply. But in a rising interest rate environment, it often makes sense to lock as soon as possible in case rates go up prior to your closing.
“Often, borrowers lock in their interest rate after they have been approved so that the rate doesn’t change before the loan closes,” says Solomon. “A rate lock duration might range from 15 to 60 days, depending on your lender, region, and loan type. If your loan does not close before the rate lock period expires, you can extend it, which may incur additional fees.”
Or, you may be able to float down your rate. That means you can lock in at a predetermined rate now, but if rates go lower within the lock period you can get that lower rate instead.
4. Enter the underwriting phase
Your lender will begin the underwriting process after you submit your application. Underwriting involves analyzing your financial details and verifying that every document and piece of information you provided is accurate, thereby establishing your creditworthiness. Underwriting can take a few days to a few weeks, based on many different factors.
The underwriting stage usually includes getting a home appraisal. This involves having a professional appraiser, chosen by the lender but paid for by you, carefully evaluate your home to determine its current accurate value.
“It’s [generally] required to have an appraisal before getting approved for your refinancing. However, the appraisal can be waived if you have an FHA, VA, or USDA loan or if you had your property recently appraised,” says Warner Quiroga, a 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, the Mortgage Reports loan expert and licensed MLO.
The appraiser may need to enter your home to complete the evaluation. For best outcomes, make minor repairs and clean and prep your home prior to the appraisal.
5. Close on your new loan
Once underwriting has been completed to the lender’s satisfaction, your loan will be approved and you can move forward to the closing stage. This is when your new loan is finalized, all paperwork is 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 your loan’s final figures,” continues Solomon. “Fortunately, a refinance closing takes less time than a home purchase closing. The only people who have to attend are anyone listed on the loan or title and a representative from the lender or title company.”
On your closing date, at the closing location specified by your lender, you’ll review your loan specifics and sign your loan documentation. At this time, any closing costs that aren’t bundled into your loan will have to be paid. If you are taking cash out, this is when you will receive the funds.
How to prepare before you refinance
The five steps above 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 eligibility. So take the time to check your credit reports and credit score before shopping for lenders. And work to improve your score and clean up any errors or inconsistencies you see on your credit reports.
Also, before you refinance:
- Avoid making any large purchases
- Avoid opening any new accounts or lines of credit before applying
- Pay all your bills on time
- Pay off smaller, existing debts if possible
These moves will prevent your credit score from dropping before you apply. And if you can raise your score by a few points, it could earn you a lower interest rate and bigger savings on your new mortgage loan.
“The better your financial situation is before you refinance, the more likely you will receive an ultra-low rate,” suggests Solomon.
When to refinance your home loan
“There are a few instances when it makes sense to refinance your mortgage,” says Matt Hackett, operations manager 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 to a lower interest rate can reduce your monthly mortgage payment and the total interest paid over the life of the loan, making homeownership more affordable,” Hackett explains.
Another good reason to refinance is to convert your home equity into cash via a cash-out refinance.
The proceeds can be used to pay down high-interest debt, fund a home improvement project, start a new business, or pay for a major expense like medical bills. In fact, there’s no limit to what you can do with the funds from a cash-out refinance — though some uses are better than others.
Other common reasons to refinance include:
- Decreasing your loan’s terms, say from a 30-year to a 15-year mortgage, so you can pay off your debt sooner and save thousands on mortgage interest
- Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage loan to avoid rising rates and higher monthly mortgage payments
- Removing private mortgage insurance that may be required on your current loan. For example, if you have an FHA loan that you put 3.5% down on originally, you have to pay mortgage insurance for the life of the loan unless you refinance
Check your refinance eligibility
The first step when refinancing a mortgage is to set your financial goals and check your eligibility with a lender.
If you’re ready to get started, you can do that right here.