How to Refinance a Mortgage
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Refinancing a mortgage involves replacing your current home loan with a new one. Homeowners might refinance to get a lower interest rate, shorter loan term or change loan types.
Knowing how to refinance a mortgage, including the refinance process, costs, timeline and other factors, can help you better decide if refinancing your home is the right move.
What is refinancing?
A mortgage refinance is when you replace your mortgage with a new loan that has better terms, such as a lower refinance rate or monthly payment. Other reasons to refinance a mortgage could include shortening a loan term, eliminating a loan with private mortgage insurance or switching from an adjustable rate to a fixed rate.
Use LendingTree’s mortgage refinance calculator to get an idea of the savings you might reap from a lower interest rate or shorter term.
How does refinancing work?
In a home refinance, your new loan will pay off the old loan, and typically allow you to start over with a new rate and better terms. Lenders take your application and do a thorough check of your finances and credit (again) before providing you with a loan estimate that outlines the terms and costs of your new mortgage.
You want to stay in your home long enough to recoup your mortgage refi closing costs, which is typically a few years. This is known as reaching the break-even point, or when the monthly savings from a home loan refinance offsets the costs. To calculate the break-even point, divide the monthly savings by the total refinance costs. The result will tell you how many months you need to stay in your home to recoup those costs.
How to refinance a mortgage in 8 steps
In order to refinance a mortgage, you go through almost the same process as you did when you first took out your loan. Here’s how to refinance a mortgage in eight steps:
- Decide on your refinance goal
- Check your credit score and finances
- Figure out how much equity you have
- Shop around for a mortgage
- Choose a refinance lender
- Lock in your rate
- Prepare for the property appraisal
- Close on your home refinance
1. Decide on your refinance goal
A mortgage refinance should help you improve your financial picture. In lending terms, this is called a tangible net benefit. Set a clear goal upfront — lowering your payment, paying your loan off faster, tapping equity, etc. — so you know exactly what you’re trying to achieve. This will also help lenders better prioritize what you need when quoting mortgage offers.
2. Check your credit score and finances
Pull your credit reports for free from AnnualCreditReport.com ahead of time and check your scores, too. If you spot errors on your credit reports, notify the credit agency in writing to correct them. Lenders will fully vet your finances, including your income, employment history, debts, assets and credit scores.
3. Figure out how much equity you have
In general, the more equity you have, the better your mortgage rate will be. You build equity over time by paying down your principal loan amount and/or because home values in your area have increased. To find your equity amount, subtract your current mortgage balance (and any other loans against the home) from your home’s current value.
4. Shop around for a mortgage
Apply for a refinance with three to five lenders within 14 days (and typically no more than 45 days, depending on which version of the scoring model each lender uses). During this time frame, multiple credit checks will count as a single credit inquiry on your report and won’t negatively impact your credit. Look closely at the loan estimate (LE) from each lender to compare rates, closing costs, lender fees and other key loan terms.
5. Choose a refinance lender
Once you’ve compared estimates, choose a lender who can help you best achieve your refinance goal. The LE should detail how much cash you’ll need to close, as well as the terms of your new mortgage.
6. Lock in your rate
Make sure you lock your mortgage rate as soon as possible. Rates change daily, and the rate quoted to you yesterday may not be accurate today. Locking in a rate sooner rather than later guarantees that the terms you were quoted won’t change.
7. Prepare for the property appraisal
Your lender will order a home appraisal to determine your home’s value. Make sure you tell the appraiser about any improvements you’ve done to the home. It’s also a good idea to clean your home and make it as presentable as possible.
8. Close on your home refinance
Ensure all of the details on your closing disclosure are correct, and make sure your closing costs haven’t dramatically increased from the loan estimate. You’ll pay closing costs and sign paperwork for your new loan, and your old loan will be paid in full by your new lender.
How much does it cost to refinance a mortgage?
There are three different types of closing costs to consider when refinancing a mortgage: lender fees, third-party fees and escrow costs, such as property taxes and homeowners insurance. These fees typically total about 2% to 6% of the loan amount.
Should I refinance my mortgage now?
With historically low mortgage rates expected to stick around, many homeowners are asking “Is refinancing worth it?” Refinancing should help you save money in some way. Here are some of the potential benefits of a refi to help you decide when to refinance your mortgage:
You’ll get a lower refi rate. A lower refinance rate means you could save thousands in interest payments over your loan’s lifetime. It could also lead to lower monthly payments.
You’ll lower your monthly payments. By snagging a lower refinance rate or extending your loan term, you could reap monthly savings, freeing up more of your budget for other goals. However, keep in mind that resetting your loan term to a new 30-year loan will lead to more total interest paid.
You’ll have more stable mortgage payments. When ARMs reset, the interest rate can go up or down, and this can take borrowers by surprise in a rising rate environment when interest rates increase, driving up monthly payments. With a fixed-rate loan at current refinance interest rates, though, you’ll have stable payments for the life of the loan — and more peace of mind.
You’ll ditch mortgage insurance costs. Mortgage insurance can add up over the long term. If you have an FHA loan with the maximum financing option, mortgage insurance premiums cannot be canceled. The only way to remove it is to refinance into a conventional loan once you’ve gained 20% equity.
You need to borrow cash. Home equity can be a powerful tool when used wisely. Cash-out refinance rates are often lower than those for other financial products. If you put the money toward improving your home, you’ll increase its value. If you use a cash-out refi to consolidate high-interest debt, you could reap substantial interest savings and pay off debt more quickly.
You want to remove a person’s name from your mortgage. If you get a divorce or otherwise need to remove a co-borrower from a mortgage, a home loan refinance is the only way to do it. This frees the co-borrower of the financial liability to the mortgage, but it doesn’t remove their name from the title of the home, which is a separate process.
You want to combine two mortgages into one loan. If you have a second mortgage, like a home equity loan or HELOC, mortgage refinancing may save on interest and hassle by combining the second loan with your first loan balance into one new mortgage.
Home refinance FAQs
Can I refinance my mortgage with no closing costs?
You can refinance a house without paying closing costs. A no-closing cost refinance doesn’t require any upfront closing fees, but that doesn’t mean you won’t pay for it. Your lender will either roll the closing costs into your mortgage by increasing your loan amount or offering you a higher interest rate. As a result, your monthly payments are higher for the life of the loan.
What credit score do I need to refinance a mortgage?
The credit score you’ll need for a mortgage refinance will vary by loan program. For a conventional rate-and-term refinance, you’ll need at least a FICO Score of 620 or higher, while a minimum of 580 is required for an FHA loan.
Can I refinance a mortgage with bad credit?
You can refinance a mortgage with bad credit, but your options will be more limited for a conventional rate-and-term refinance. Some government-backed loan programs, like FHA loans and VA interest rate reduction refinance (IRRRL) loans, offer refinance options to eligible borrowers who may not have stellar credit. You also can work with an alternative or nonprime lender if you have bad credit, or simply wait to refinance your home until you improve your credit score.
Is it better to refinance with the same lender?
You can certainly refinance with the same lender, but shop around first to ensure you’re getting your best mortgage refi rates. Compare loan estimates from your current lender and at least two other companies to evaluate refi rates, as well as closing costs and lender fees. If you choose to work with your current lender, scrutinize the new loan agreement carefully so you fully understand the loan terms.