You’re looking to make a smart move with your mortgage – great. It’s a big decision to consider how to refinance your mortgage and can seem confusing if you’re not sure where to start. Lower monthly payments? Paying off your home loan sooner?
It can be exciting to think about, but actually getting from considering refinancing to refinancing success takes a clear, strategic approach. In this guide, we’ll walk through everything involved in how to refinance a mortgage. From understanding your financial situation and goals to comparing lenders and loan options, we’ll cover it all.
Understanding Mortgage Refinancing
A mortgage refinance involves replacing your existing mortgage with a new one. This new mortgage will ideally have terms more favorable to your financial goals.
This could mean securing a lower interest rate. Or maybe you’re seeking a different loan term. You might even tap into your home equity.
This is why thinking about “how to refinance your mortgage” can be confusing: there are so many ways it can go. But before diving into the details of how to refinance your mortgage, let’s first figure out if it makes sense for you.
When to Consider Refinancing
Think of refinancing like a financial tune-up for your home. Just like you wouldn’t hesitate to take your car in for service if you saw a warning light, you’ll want to carefully weigh whether a refi could improve your investment.
It might be a good time to consider refinancing if:
- Interest rates have fallen: Securing a lower interest rate is one of the most common reasons homeowners opt for refinancing. A lower interest rate can help you save money over the life of your loan.
- Your financial situation has improved: This might mean a higher credit score. Maybe you’ve had a salary increase. Even a lower debt-to-income ratio counts.
- You want to shorten your loan term: Refinancing to a shorter-term mortgage could mean higher monthly payments. However, you’ll have significant savings in the long run thanks to lower interest paid over time. You may be able to refinance from a 30-year mortgage to a 15-year mortgage and save money overall.
- You need cash for large expenses: A cash-out refinance lets you tap into your home’s equity for things like renovations. You can also use a cash-out refinance for debt consolidation or education costs.
Evaluating Your Financial Readiness
Before starting the “how to refinance mortgage” process, determine your overall financial picture. Are you ready? Consider the following:
- Credit score: This is a major factor in getting approved for a refinance and scoring a favorable rate. A higher credit score can help you qualify for a lower interest rate. You may want to check your credit report before applying to see where you stand.
- Home equity: A lender won’t loan on 100% of your home’s value. The more equity you have, the better your chances of getting approved for a refinance.
- Debt-to-income ratio: Your DTI factors heavily into loan eligibility, demonstrating your ability to repay your debts based on your current income. Lenders will look at your DTI to see how much of your income is going towards debt payments.
Step-by-Step Guide on How to Refinance Your Mortgage
Alright, ready to dig into the how-to? Let’s break the process down step-by-step:
1. Determine Your Goals
Getting clear on why you want to refinance will guide you toward the right kind of refi. Are you hoping to snag lower interest rates? Want to change your loan term from 30 to 15 years? Maybe do some home improvements with a cash-out refi?
2. Shop Around and Compare Lenders
Don’t be afraid to shop around. Gather quotes from several mortgage lenders, including your current one.
This will give you leverage to potentially secure the best terms and rates available for your financial picture. You can use a loan calculator to get an idea of what your monthly payments would be with different loan terms and interest rates.
When comparing lenders, consider the following:
- Interest rates
- Closing costs
- Lender fees
- Customer service
Asking questions about the refinance process can make a big difference in your overall experience.
3. Gather Your Documentation
You will typically need two years of tax returns. You’ll also need W-2s (or 1099s for self-employed borrowers). Recent pay stubs, bank statements, and other documentation may be requested as well.
Just like you went through the process of proving your income and creditworthiness for your original mortgage, you’ll need to provide lenders with a financial snapshot of where you’re at *now*.
4. Complete the Application
Fill out the chosen lender’s application form thoroughly and honestly. Just like with step three, be prepared to provide additional documents, such as proof of insurance (homeowners, flood insurance).
The lender may make these requests throughout the process. Keep the lines of communication open with your point of contact at the lender to stay informed on what to anticipate.
5. Underwriting and Appraisal
Be ready for the waiting game. It’s sometimes referred to as the “hurry up and wait” phase of buying and/or refinancing. Your lender digs deeper into your finances, combing through those pay stubs, bank statements, and verifying employment and assets.
There is also the home appraisal, where a professional determines your home’s current market value to figure out your loan-to-value ratio and how much equity you have in your property.
6. Loan Approval and Closing
Congratulations. If you’ve made it this far, your lender will draw up your new mortgage loan paperwork for your final sign-off. Closing is where you officially switch over from your old mortgage to your new, improved loan with new terms.
In Closing
Figuring out how to refinance your mortgage can feel intimidating, especially as life circumstances, goals, and market factors come into play. However, it is an important financial step. Refinancing can help your house work better for your overall financial wellness and help you accomplish those dreams and goals.
