What is refinancing a home?
Refinancing a home means switching to a new mortgage, either with the same lender or a new one, to get a more favorable loan or cash out your home's equity. Once you close on a refinance, your new lender will pay off your old loan, and you'll start making payments on your new one. Refinancing your mortgage can help you save more or help pay for home repairs, renovations, or even consolidate high-interest debt.
How to refinance a mortgage
1. Shop around
Refinancing a mortgage starts with shopping around for loan offers. You should first consider the type of refinance you're after. You can typically refinance into any type of home loan if you meet the requirements. If you have a conventional loan and you're looking to lower your interest rate, then you may shop refinancing options for a conventional loan. If you need to pay for a home renovation or want to pay off other debts, then a cash-out refinance or home equity loan may suit your needs.
Important note: Compare mortgage interest rates between different lenders to find a better loan offer than your current mortgage.
To apply for a mortgage refinance, you typically need the same documentation you provided for your original loan, including:
- Recent W-2s and tax returns from the last few years
- Recent pay stubs
- Recent bank statements
3. Lock in your rate
Once you've started the refinance process and submitted an application, you can choose to lock in your rate for a certain amount of time (ranging from a couple of weeks to a couple of months) while your loan application is being processed/worked.
Though not common, some lenders may give you the option to "float" your rate instead, which allows you to keep your rate unlocked until you're ready to close on your new mortgage. If you decide to float your rate, your final rate may be lower or higher than the initial offering, making it a riskier option.
4. Underwriting & home appraisal
Your lender will start verifying the information you provided in your application, including confirming your income and other financial information, as well as the details about your property. For most refinance applications, you'll also need to get your home appraised. The appraiser will assess your home's market value, which your lender will use to ensure its appraised value is high enough to cover the amount you're borrowing.
5. Closing on your loan
You're now ready to close on your new refinanced mortgage. This step entails going over the finalized details of your new loan with your bank's representative, as well as paying closing costs if they're not included in your new loan amount. You'll have a chance to double-check everything, including your loan term, interest rate, and payment schedule. If everything looks good, you'll sign the paperwork and officially close on your loan.
Important note: You have three days after signing to cancel the refinance if you so choose. After that three-day grace period, you're locked into your new loan.
When should you refinance a mortgage?
Deciding when to refinance your mortgage depends on various factors, and it's a decision that should be based on careful consideration of your financial goals and the current market conditions. Typically, good times to refinance your home are when interest rates dip below your current rate or if you need to access the equity you have built up in your home to get cash.
- Lower interest rates: If current mortgage interest rates are lower than the rate on your existing mortgage, refinancing could result in lower monthly payments and potential interest savings over the life of the loan.
- Cash-out refinance: If you have substantial equity in your home and need funds for home improvements, debt consolidation, education, or other purposes, a cash-out refinance allows you to borrow against the equity in your home.
Before deciding to refinance, it's important to carefully evaluate the costs associated with refinancing, including closing costs, and compare them with the potential benefits, such as lower monthly payments or interest savings. Additionally, consider your long-term financial goals and how refinancing fits into your overall financial plan. Consulting with a mortgage professional or financial advisor can help you make an informed decision based on your specific circumstances.
WHEN CAN YOU REFINANCE?
Some types of loans may have a six-month waiting period before you can refinance, while others may let you as soon as you want. The waiting period generally depends on the program and type of loan you have.
Should I refinance my mortgage?
There are many reasons to consider refinancing your mortgage. Some of the most common include:
- Getting a lower interest rate: If interest rates have dropped since you bought your home, then you could secure a lower interest rate with a new mortgage.
- Paying off more expensive debt: A cash-out refinance allows you to exchange your equity for cash, allowing you to pay down higher interest debt (such as credit cards). With this type of refinance, you borrow more than you currently owe and can use the cash to pay off other debts.
- Changing your loan term: Switching to a longer loan term can lower your monthly payments, which can make your mortgage payments more manageable. However, you'll end up paying more in interest over time.
- Paying for home repairs & remodels: A cash-out refinance or home equity loan (where you borrow against your home's equity) can give you an affordable way to pay for expensive home repairs or renovations.
- Switching from an adjustable rate to a fixed rate: An adjustable-rate mortgage (ARM) is typically cheaper than a fixed-rate mortgage initially, but your interest rate can go up or down. Switching to a fixed-rate mortgage can give you consistent monthly payments.
Important note: Refinancing a home typically includes some out-of-pocket costs, such as paying for an appraisal and closing costs (some lenders will roll closing costs into your loan). Consider the total amount you'll need to pay out of pocket for that lower rate before finalizing the terms of your refinance.
MOVING & REFINANCING
If you plan to move soon, then you may be better off keeping your current mortgage. Refinancing a home loan requires paying for a variety of things, including closing costs, that can add up to a decent chunk of change. If you refinance and then move soon after, you may not have enough time to realize the benefit from the refinance to offset the associated closing costs.