How to Refinance a Mortgage (8 Easy Steps)

It doesn’t matter how long ago you purchased your house, whether it’s been just a few years or several decades. Consider re-evaluating your current mortgage and living situation to determine whether a refinance could benefit your wallet.

refinancing mortgage

The process is almost as in-depth as getting a new mortgage, so we’ll show you exactly when you should consider refinancing and how to complete the process.

What is mortgage refinancing?

Mortgage refinancing involves replacing your current home loan with a new one, often with different terms. This financial move can be strategic for homeowners looking to adjust their mortgage rates, change the loan’s term, or access home equity. However, it’s not just about getting a lower interest rate; it’s a decision that can significantly impact your financial landscape.

Benefits of Refinancing

Refinancing a mortgage offers several advantages, depending on your financial goals. One of the primary reasons homeowners refinance is to secure a lower interest rate, potentially saving thousands over the life of the loan. Additionally, changing the term of your loan can adjust your monthly mortgage payment to better suit your current financial situation. This could mean shortening your loan term to pay off your mortgage faster, or extending it to reduce your monthly payment.

Accessing equity through a cash-out refinance is another draw. This option allows homeowners to tap into the equity built up in their home, providing funds for home improvements, debt consolidation, or other significant expenses.

Potential Drawbacks to Consider

While the benefits of refinancing a mortgage can be substantial, there are also important considerations to weigh. Refinancing comes with costs, including application fees, appraisal fees, and closing costs, which can add up to thousands of dollars. You need to calculate whether the long-term savings outweigh these upfront costs.

Moreover, refinancing can affect your credit score. Applying for a new mortgage means your lender will perform a hard inquiry on your credit report, which can temporarily lower your score. Additionally, closing your old mortgage account and opening a new one can shorten your credit history, further impacting your score.

Another aspect to consider is the potential extension of your loan term. While securing a lower interest rate can save money on monthly payments, extending your loan term might mean paying more in interest over the life of the loan, even at a lower rate.

When should you refinance your mortgage?

Refinancing your mortgage presents an opportunity to adjust your home loan to better fit your current financial situation and goals. So, it’s wise to assess both the timing and rationale behind the decision to refinance. Below, we explore several pivotal scenarios that might prompt a homeowner to consider refinancing.

Lower Interest Rates or Improved Credit

If the market interest rates have dropped since you secured your original mortgage, or if your credit score has significantly improved, refinancing could be a wise choice. Lower interest rates mean you could enjoy reduced monthly payments, potentially saving you money over the life of your loan.

However, it’s important to consider the overall impact. Refinancing to a lower interest rate but extending your loan term can mean paying more interest over the life of your loan. It’s beneficial to use a refinance calculator to evaluate whether the long-term savings truly offset the costs.

Eliminating PMI Coverage

Private mortgage insurance (PMI) is required for homeowners who put down less than 20% of their home’s value. Once you’ve built up 20% equity in your home, refinancing can be a strategic move to eliminate PMI payments. This change can lead to considerable monthly savings, as PMI costs up to 1% of your entire loan amount annually.

When considering dropping PMI through refinancing, it’s also essential to weigh the potential savings against the costs of refinancing, including closing costs and any remaining loan balance. The financial gains from refinancing should convincingly outweigh these expenses.

Accessing Home Equity through Cash-Out Refinance

Homeowners looking to access their built-up home equity for large expenses—such as home renovations or debt consolidation—may find a cash-out refinance appealing. This option replaces your existing mortgage with a larger one, allowing you to pocket the difference in cash.

While a cash-out refinance can provide the funds needed for significant expenditures or to reduce high-interest debt, it’s vital to approach this option with a strategic financial plan. Leveraging home equity comes with risks, including the possibility of a higher monthly payment and extending the time it takes to pay off your home.

See also: How Much Does it Cost to Refinance a Mortgage?

How soon can you refinance your home?

Refinancing your mortgage can be a strategic move to lower interest rates, adjust loan terms, or access equity. The right time to refinance depends largely on the equity you’ve built up in your home—typically, 20% equity is needed for a cash-out refinance, while changing your rate or term may require as little as 5% to 10%. If you’ve refinanced before, most mortgage lenders will expect you to wait about six months before applying again.

One important factor to consider is the potential for prepayment penalties on your existing mortgage, which can impose a significant cost for paying off your loan early. These penalties are designed to compensate lenders for lost interest payments and can make a big difference in the financial benefits of refinancing. Before proceeding, it’s important to review your loan agreement for any prepayment clauses to ensure that refinancing makes financial sense.

Step-by-Step Guide to Refinancing Your Mortgage

Refinancing your home doesn’t happen overnight. In fact, there are several steps involved. Here’s a play by play so you know exactly what to expect.

1. Determine the Type of Refinance You Want

We’ve talked about setting a goal for your refinance and this is a huge part of starting the process. You may want a standard refinance that merely adjusts your interest rate. Or perhaps you want to cash out some of your equity. Alternatively, you may wish to refinance out of an adjustable-rate mortgage to a fixed-rate or switch the length of your term.

2. Check Your Credit Score

Once you know the type of mortgage loan you want, it’s time to start preparing for the process. Knowing your credit score lets you know a bit more what you can expect in terms of loan qualification and refinance rates.

Some loan types have absolute minimums, while others are more flexible. Check your credit score upfront so that you can get an idea of whether you meet basic refinance requirements.

3. Estimate Your Home’s Value

Next, you need to get an idea of how much your home is currently worth. The best way to do this is to look at comps in your neighborhood.

Check websites like Zillow and to find out what current sales prices look like, as well as properties that have been recently sold. Take a look at the price per square foot for these homes and apply that number to the square footage of your own home.

Of course, that’s not an absolute. Your home’s true value depends on several factors, including upgrades and lot size. But you can take these things into consideration to get a general idea of what your appraisal value could be.

4. Compare Lenders

You don’t have to refinance with your current mortgage lender. In fact, it’s smart to shop around to find the best loan terms. Compare all the details of your refinance offer. Getting a lower interest rate is definitely important, but you also want to consider potential closing costs and origination fees.

How a lender structures the new loan is also significant and can influence your decision. If you’re trying to save on how much cash you spend upfront, you might prefer a lender who lets you incorporate your closing costs into the loan amount. Alternatively, low rates may be the most influential factor when choosing a lender.

5. Get a Loan Estimate

After comparing rates and fees from multiple mortgage lenders, you can get a loan estimate from your top choices. A loan estimate is a form that provides essential information about the terms of a mortgage refinance loan.

It is intended to help borrowers compare different loan offers and make an informed decision about which one is the best fit for them. The loan estimate includes the loan terms, the projected monthly payment, the closing costs, and other charges associated with the loan. It also includes information about the lender, the mortgage broker (if applicable), and the real estate broker (if applicable).

6. Prepare for Your Application

After you pick out a lender with the mortgage rates and terms you like, it’s time to start gathering your documentation for your refinance application. You’ll likely need things like bank statements, tax forms from the last two years, and pay stubs.

Getting all of this paperwork together in advance can save time during the application and underwriting processes.

7. Get Ready for the Appraisal

Part of the mortgage refinance process is to get a professional appraisal on your home. Your lender typically orders this, and the fee is usually included in your closing costs. Make sure your home is clean and presentable. You don’t need to make major changes, but picking up ahead of time can create a good impression on the appraiser, as can a freshly mowed yard.

8. Anticipate Your Needs for Closing

Closing on a refinance is similar to when you originally closed on your home. Typically, your lender will arrange a meeting with a public notary so you can sign all of your paperwork. You can make this at a time and place that is convenient for you. If the refinanced loan is in both your name and someone else’s, like your spouse’s, then you’ll both need to be present to sign.

Once the paperwork is complete, you’ll start making monthly payments to your new lender as scheduled in your closing documents. Any new terms or rates will also apply so you can start paying down your newly refinanced home loan.

Frequently Asked Questions

What are the eligibility requirements for a mortgage refinance?

To be eligible for a mortgage refinance, you generally need a good credit score, sufficient home equity, and a stable income. Lenders look for a credit score of 670 or higher, at least 20% equity in your home for a standard refinance, and a lower percentage for other types of refinancing. Your debt-to-income ratio should also meet the lender’s requirements, demonstrating your ability to manage the new loan payments.

How do I compare refinancing options?

Compare refinancing options by looking at interest rates, loan terms, and closing costs. Consider using online comparison tools or reaching out to a mortgage broker to get personalized advice. Pay attention to the annual percentage rate (APR), which includes the interest rate plus any additional fees, to understand the true cost of the loan.

What are closing costs?

Closing costs are fees associated with obtaining a new mortgage and typically include appraisal fees, title searches, application fees, and attorney fees. These costs can range from 2% to 5% of the loan amount, depending on the lender and the loan type.

How much do closing costs typically cost?

Closing costs for refinancing can vary widely, but generally range from 2% to 5% of the loan amount. The exact amount will depend on the lender, the size of the loan, and the location of the property.

Can I refinance my mortgage if I have bad credit?

It’s possible to refinance with bad credit, but you may face higher interest rates and less favorable terms. Some lenders specialize in loans for those with less-than-perfect credit. Improving your credit score before applying can increase your chances of securing better refinancing terms.

How long does it take to refinance a mortgage?

The refinancing process can take anywhere from 30 to 45 days on average, though this timeline can vary based on the lender, the complexity of your financial situation, and other factors.

What impact does refinancing have on my credit score?

Refinancing can temporarily impact your credit score due to the lender’s hard inquiry into your credit report and the closing of your old mortgage account. However, making consistent, on-time payments on your new mortgage can help your credit score recover and potentially improve over time.

Can I refinance with my current lender?

Yes, you can refinance with your current lender, but it’s still wise to shop around and compare offers from multiple lenders to ensure you’re getting the best deal possible.

Is refinancing worth it if I plan to move soon?

Refinancing may not be worthwhile if you plan to move in the near future. The upfront costs associated with refinancing can take several years to recoup through savings on your monthly payments. Calculate your break-even point to determine if refinancing makes financial sense given your future plans.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.