How To Refinance Your Mortgage

How To Refinance Your Mortgage
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There are several reasons why you might choose to refinance your mortgage, such as if you can qualify for a lower interest rate or pay off your mortgage faster. But before you proceed, it’s important to understand the potential downsides as well as exactly what the entire process entails.

If you’re wondering how to refinance your mortgage, here’s what you need to know.

What Is a Mortgage Refinance?

A mortgage refinance is when you take out a new loan—ideally one with better terms—to pay off your current one. Similar to getting your first mortgage, you’ll generally need decent credit, verifiable income and a low debt-to-income (DTI) ratio to qualify for conventional refinancing.

However, there are also different options that might better suit your needs, such as if you refinance a loan backed by the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) or Department of Veterans Affairs (VA).

Types of Mortgage Refinances

There are multiple kinds of refinance loans available but here are the more common types.

  • Rate-and-term refinance: This allows you to get a new rate and different terms on a new loan. If you have a conventional loan, you can refinance into a new conventional loan or opt to refinance into a government-backed loan—or vice versa.
  • Cash-out refinance: With this option, you’ll pay off your existing mortgage with a new, larger loan. You’ll then get the difference as a lump sum to use how you wish (minus any closing costs or fees). In addition to conventional cash-out refinance loans, FHA and VA cash-out refis are also available.
  • FHA streamline refinance: If you already have a loan backed by the FHA, this will allow you to refinance into a new FHA loan with lower with less stringent documentation and underwriting requirements as well as no appraisal. This allows for faster processing compared to a traditional refinance. Additionally, the FHA provides both a credit-qualifying and a non-credit-qualifying streamline refinance option, depending on your situation.
  • USDA streamline refinance: Like an FHA streamline refinance, this allows current USDA borrowers to refinance their loans even if they have little to no equity in their homes. You can opt for a streamline-assist refinance or a standard streamline refinance, which is somewhat harder to qualify for. Neither type of loan requires an appraisal unless you received a subsidy while taking out your original USDA loan.
  • VA interest rate reduction refinance loan (IRRRL): If you already have a VA loan, you could qualify for this kind of loan (also known as a VA streamline refinance) to take advantage of more favorable terms. Like the options from the FHA and USDA, a VA IRRRL allows for faster processing with less paperwork, no credit check and no underwriting. You also usually won’t have to worry about an appraisal.

Steps to Refinance Your Mortgage

If you’re ready to refinance your mortgage, there are some key steps to help you got the best refi deal possible.

1. Check Your Credit

Like with other kinds of loans, you’ll typically need a decent credit score to qualify for refinancing. The exact eligibility criteria will depend on the type of loan you choose and the individual lender, with some having less stringent qualifications than others.

Here are the minimum credit score requirements you can typically expect:

  • Conventional: 620
  • FHA: 580 (if lower than this, must provide a 10% down payment)
  • USDA: No specific minimum (most lenders require a score of at least 640)
  • VA: No specific minimum

The lender will also consider your credit to determine the interest rate you qualify for. In general, the higher your credit score, the lower your rate—so it’s a good idea to check your credit beforehand to see where you stand. You can use a site like AnnualCreditReport.com to review your credit reports for free. If you find any errors, dispute them with the appropriate credit bureau to potentially boost your credit score.

2. Consider Other Requirements

While eligibility criteria can vary by lender, some common requirements in addition to credit score include:

  • Verifiable income. Lenders want to see that you can afford to repay the loan. This means you’ll need to provide proof of income, such as recent tax returns, W-2s or 1099 forms.
  • A low DTI ratio. Your DTI ratio is the amount you owe in monthly debt payments compared to your income. To qualify for refinancing, your DTI ratio should be no higher than 50%—though some lenders might require lower ratios than this.
  • Sufficient equity. Home equity is the difference between what your home is worth and what you still owe on your mortgage. Lenders typically want borrowers to have built at least 20% equity in their homes before refinancing. While you might still get approved with less equity than this, you could get stuck paying a higher interest rate or mortgage insurance as a result.

3. Compare Lenders and Pick a Loan Option

Be sure to shop around and compare as many mortgage refinance lenders as possible so you can find a good deal more easily. This also includes your current lender, who might be willing to reduce or eliminate some of the usual refinancing fees, such as the application or origination fee—especially if you show them additional offers from other lenders.

As you weigh your options, make sure to consider not only interest rates but also repayment terms, any fees charged by the lender and eligibility requirements. Also keep in mind that many lenders offer prequalification, which will let you see how much you might be able to borrow after providing some basic information and agreeing to a soft credit check that won’t hurt your credit score.

After you’ve done your research, choose the lender and loan option that works best for you.

4. Gather Your Documents and Submit the Application

Like when you applied for your first mortgage, you’ll need to provide several documents to the lender when you apply for refinancing.

  • Income and employment verification: This can include tax returns, pay stubs and 1099s.
  • Asset statements: Like bank statements and retirement account statements.
  • Debt statements: Such as documentation related to your current mortgage, credit cards or student loans.

The lender might also ask for other miscellaneous documents, such as gift letters, proof of child support or alimony payments or documentation explaining a previously discharged bankruptcy.

Once you’ve gathered the necessary documents, you’ll need to fill out an application with the lender you’ve chosen. Many provide a fully online application while others might require you to visit a local branch location.

In many cases, the lender will schedule a home appraisal—though keep in mind that you’ll likely cover the fee. The average cost for an appraisal is usually $300 to $400 for a single-family home but could range up to $600 or more for a multi-family home.

5. Lock In Your Interest Rate

If you are approved and accept the loan offer, you might be able to lock in your interest rate, which means you can preserve it for a period of time while the lender processes your loan—usually anywhere from 15 to 60 days. This can protect you from rates rising, but it could also mean being unable to take advantage of rates potentially falling unless your lender provides a “float down” option.

Keep in mind that while some lenders offer rate locks for free, others charge a fee, especially for longer rate-lock periods.

6. Close on the Loan

This is when you’ll pay the closing costs associated with your loan, which typically range from 2% to 5% of your loan amount. You can check your loan estimate or closing disclosure (both provided by your lender) to see exactly how much you’ll owe in closing costs.

Some common fees that you might be charged include:

  • Application fee: $75 to $500
  • Origination fee: 0.5% to 1.5% of your loan amount
  • Credit check fee: About $25
  • Title services: $400 to $900

Depending on your lender, you might have the option of a no-closing-cost refinance, which is where these fees are rolled into your total loan amount. However, while this means you might save some money on your closing day, you’ll likely end up with a slightly higher interest rate—and you’ll be paying interest on your closing costs.

How Long Does It Take to Refinance a Mortgage?

Refinancing a mortgage can take anywhere from 45 to 60 days, depending on the type of loan you choose. For example, government-backed loans generally take longer to close than conventional loans.

To help avoid delays, make sure to fill out the application as accurately as possible, provide any requested documentation in a timely manner and be prepared for the home appraisal (if required).

Should You Refinance Your Mortgage?

While refinancing could be a good choice in several cases, it isn’t the right move for everyone. Here are some pros and cons to consider to help you decide whether you should refinance your mortgage.

Pros of Refinancing Your Mortgage

  • Lower your interest rate. Depending on your credit, refinancing might get you a lower interest rate, which could save you a significant amount of money over the life of your loan.
  • Shorten your repayment time. If you opt to shorten your term—for example, switching from a 30-year to a 15-year term—you’ll be able to pay off your mortgage faster while also saving money on interest. Many lenders also offer better rates on shorter terms. Just keep in mind that reducing your repayment time will increase your monthly payments.
  • Switch your rate type. If you currently have an adjustable-rate mortgage, you can switch to a fixed-rate loan through refinancing—or vice versa.
  • Tap into home equity. Opting for a cash-out refinance can help you cover a wide variety of expenses, such as home improvements or debt consolidation. You can use our cash-out refinance calculator to see how much you could qualify for and what your monthly payments might look like.

Cons of Refinancing Your Mortgage

  • Stringent requirements. You’ll have to meet the lender’s eligibility criteria in order to refinance, which usually means you must have decent credit, verifiable employment, a low amount of debt and a sufficient amount of home equity. While government-backed loans tend to have more relaxed qualifications, you’ll still need to satisfy the requirements set by the lender you choose.
  • Closing costs. As with your original mortgage, you’ll pay a hefty amount in closing costs to refinance your loan. While some lenders offer no-closing-cost mortgages, this simply means your closing costs will be rolled into your loan amount—and you’ll pay interest on those fees.
  • Higher monthly payments. If you choose to shorten your repayment term, you’ll save money on interest, but your monthly payments will increase. You can use our mortgage refinance calculator to estimate what your payments could look like with different term options.
  • Increase total interest. Refinancing also provides the option to extend your repayment term, such as from a 15-year to a 30-year loan. This could be a helpful option if you want to reduce your monthly payments; however, doing so means you’ll pay more in interest over time.

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