When you first bought your home, you likely knew the details of your mortgage inside and out. Once the boxes are unpacked and life gets rolling along, it's easy to get complacent and only think about your home loan when you make that monthly payment.
But it's a good idea to regularly review your mortgage rate and terms as part of your overall financial picture. And if you can get a lower rate, shorten the term, or make use of the equity you've built up over the years, refinancing could be a smart move.
Refinancing simply means getting a new loan to replace your current mortgage, and the process is similar to when you secured your loan the first time around. If that all seems like a blur, don’t worry. Here's a step-by-step guide, so you know what to expect when it comes to refinancing.
1. Consider your goals.
Are you hoping to lower your monthly mortgage payment? Pay off your home in a shorter time period? Get rid of mortgage insurance you no longer need? Whatever the case, it's important to identify a clear purpose for the refinance.
Running some scenarios through a refinance calculator can help you see the total cost of your refinance and make sense of potential trade-offs. For example, if your lower monthly payment is a result of resetting to a new 30-year mortgage, you may pay more interest on the loan in the long run. The more info you have, the better you're able to decide how a refinance fits in with your goals.
2. Evaluate your financial situation.
When you refinance, you essentially get a new loan. So you still need to qualify for that credit. Take stock of your income and expenses and check your credit report and history, so you know where you stand. More often than not, the higher your credit score, the lower the refinance rates you can get.
If your scores aren't quite where you'd like them to be, it may be worth taking a few months to clean them up before you start your refinance.
3. Shop around.
The right lender and loan are crucial to making the refinance process work for you. And it’s about more than just finding the lowest rates. First of all, be sure each lender you consider has a solid reputation and expert, start-to-finish customer service.
Then, figure out which type of loan you’re looking for. The most common types of refinance loans are rate-and-term mortgages and cash-out mortgages. And they basically work just the way they sound.
With a rate-and-term refinance, you lock in a given rate for a specified term (time period). Cash-out refinancing allows you to take equity out of your home and receive the cash in exchange. This adds to your mortgage but gives you the funds for things like consolidating debt or making home improvements.
The best way to be sure you’re comparing apples to apples is to get a Loan Estimate for each loan you’re considering. A Loan Estimate will include all closing costs, including lender origination fees and an estimate of required third-party fees, like title, appraisal, recording fees, and taxes.
4. Get ready for the appraisal.
An appraisal determines your home’s current market value, and it’s one of the things you’ll need to pay for — usually around $300 to $600 — when refinancing. Be sure to disclose any significant upgrades you’ve made to the property since your initial purchase. Those improvements may get you a higher appraisal and a better loan-to-value ratio.
5. Lock your rate.
Once you’ve chosen your lender, the next step is to lock your rate. That means your lender will commit to honoring that day’s rate options, even if they go up later.
Mortgage interest rates can fluctuate daily based on how the market is doing, so locking your rate protects you from these fluctuations going forward.
While it might sound limiting, locking in a rate still leaves you with options. That’s because when you lock, you essentially request that the lender hold all of the rates available to you across all available loan products for that day. Once you lock, you can still:
Choose a different type of loan. For example, if you later decide to change from a rate-and-term to a cash-out refinance, your lender likely will honor the original day’s rates for whichever loan type you choose.
Change your mind on taking credits vs. paying points. When you lock your rate, you’re also locking all of the points and credit options associated with that rate. So, for example, if you decide later on that you want to pay more points up front for a lower rate, your lender will do that math based on the original rate you locked.
Make changes to your application. It’s possible to change your loan amount or add a co-borrower. Actions like these may change your rate options, but they’ll still be based on the day you locked your rate.
Take advantage of market moves. If rates fall by 0.25% (like from 4.125 to 3.875), you may get the lower rate. This is sometimes called a “float down” option.
6. Submit your financial documents.
Gather financial documents like recent pay stubs, bank statements, tax returns, and other items your lender may need. You’ll typically be asked to provide:
2 years of business tax returns (if you own more than 25% of a business)
2 years of W-2s or 1099s
2 months of bank statements
Proof of any alimony or child support payments
Pro Tip: Gone are the days of schlepping mounds of paper copies over to your bank in person. Many lenders now allow you to submit much, if not all, of this documentation digitally. For example, we offer the option to link your bank accounts and upload your documents digitally.
7. Stay informed during underwriting and final approval.
Once your lender has everything they need, it’s a bit of a waiting game while the loan goes through the underwriting process for review. The actual processing time can take anywhere from three days to three weeks, depending on the lender. Your lender should keep in touch with you about any remaining information they need from you and where you are in the process — some lenders offer the option of checking on the process via an online portal.
8. Prepare for closing.
Once your lender has determined that everything is in order, you’ll be notified that it’s time to set a closing date. You’ll review the closing disclosures (third-party costs, mortgage balance, prepaid costs, etc.) and set up a time to get all the necessary documents signed. Depending on your lender, you may be able to complete this step digitally, or with an e-closing.