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How does the home refinancing process work? A step-by-step look

Jan. 16, 2020• 4 min read

What we'll cover

  • What does it mean to refinance your home

  • Different types of home refinancing

  • What you will need to refinance your home

Mortgage on your mind? A home can be the biggest life purchase for many Americans, so it’s important to have a loan that’s affordable and works for you.

But your finances can change over time — and that’s when a home refinance could provide you the financial solution you need.  If you’re considering a refi, here’s how the home refinancing process works.

What does it mean to refinance your home?

Refinancing your home is a simple concept: It means paying off your current mortgage with a new one. Your new home loan replaces the previous one, and you’re responsible for paying it each month.

Why refi?

Maybe you never expected to have a new job (and its lower salary, but better work-life balance) when you bought your home five years ago. Or perhaps you plan to travel the world starting the day you retire, and for peace of mind, you want your house paid off in full before you board the plane.

You might consider refinancing in both situations.

Locking in a lower interest rate is one of the most common reasons you might think about refinancing your home. After all, a better interest rate can mean lower monthly payments — and paying less in interest over the lifetime of your loan. In our recent survey, 21% of respondents said they planned to refinance in the next year — a potentially savvy move as interest rates remain historically low.

But you might have other reasons to refinance, including a reduction in the length of your loan or freeing up cash to put towards other expenses by pulling equity out of your house.

What you hope to accomplish will determine the type of home refinance that’s right for you.

Types of home refinances

In most instances, when you hear about a refi, homeowners are referring to a rate-and-term refinance, which changes the interest rate, the term, or both.

How does it work?

Consider this: You purchased a $350,000 home and made a 20% down payment of $70,000. Your 30-year fixed-rate mortgage came with a 5.25% interest rate, putting your monthly mortgage payment around $1,500. After five years, interest rates fall 4% — a big difference.  If you rate-and-term refinance to another 30-year loan, you could save $300 a month and more than $12,000 over the life of your loan.

If you want to pay off the home sooner and refinance to a 15-year mortgage (also a rate-and-term refinance), your monthly payments would go up almost $400 a month, but you’d save a whopping $121,000 in interest.

Cash-out refinancing is another common route for homeowners. With this refinancing option, you tap into your home’s equity and pull out cash that can go toward consolidating debt, home renovations, or pretty much whatever you want.

Let’s revisit the previous example. You received a $280,000 mortgage when you purchased your home and have since paid $60,000 toward the principal. Now, you want to put a $50,000 addition onto your home, but you don’t have that money sitting around in your savings account. A cash-out refinance would give you access to the $60,000 of equity to make the home improvements you want. (A lender typically requires you to keep at least 20% equity in your home.)

Although not as common, homeowners have other refinancing options, including a cash-in refinance (which reduces the size of your home loan by increasing the amount of equity in your home) or a consolidation refinance (where you pay off a mortgage and a home equity loan or home equity line of credit and replace it with a single mortgage).

What’s it like to go through the home refinancing process?

Before you refi, you’ll need to determine if it makes sense for your unique financial situation. Our refinance calculator can help you compare your options. You’ll need to know the date you purchased your house (or when you last refinanced), plus your current loan balance, interest rate, loan term, and credit score.

You’ll also want to be aware of your loan-to-value (LTV) ratio. This can be determined by dividing your home’s total value by your mortgage amount. Lenders typically provide better loans to borrowers whose LTV is 80% or less, meaning you have at least 20% equity in your home. That’s because the lower your LTV ratio, the less risk a lender faces when loaning you money.

Then you’ll need to research lenders, refinance loan options, and rates. Comparing offers from multiple lenders can help you get the best deal for the goal you hope to achieve by refinancing (a lower interest rate, a shorter term length, etc.).

You’ll also need to fill out an application and gather the following paperwork:

  • Two years of personal tax returns

  • Two years of business tax returns (if you own more than 25% of a business)

  • Two years of W-2s or 1099s

  • Two months of bank statements

  • Proof of any alimony or child support payments

Once you decide to refinance, it’s important to remember two things:

  • On average, it takes about 30 to 45 days to refinance your mortgage.

  • You’ll be required to pay around $1,500 to $5,000 in closing costs (appraisal fees, title fees, origination fees, attorney fees, flood certification fees, and recording fees).

Life often tosses unexpected things our way. If that happens, refinancing your home could be an option that helps put your mind at ease and gives you a repayment option that works better for your lifestyle.

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