There’s a lot of hype around refinancing your mortgage. And for good reasoning!
If you qualify, you have the opportunity to lower your interest costs, reduce your monthly payment, and much more. To take advantage of these benefits, there are some steps to go through to ensure it’s the right choice for you.
In this article, you will learn how mortgage refinancing works and the steps necessary to refinance your mortgage.
Refinancing Your Mortgage: What is it and How Does it Work?
Mortgage refinancing is the process of trading in your current mortgage for a new one. Typically, homeowners refinance to receive a shorter loan term and/or a lower interest rate. However, there are several reasons borrowers inquire about refinancing.
For example, if homeowners are struggling to pay off other loans or want to partake in a larger home improvement project, refinancing can also be a good option. In these cash out instances, the total amount of the loan will increase, as will the period for interest rates.
A typical mortgage refinancing timeline is between 30 and 45 days. How does the process work? In most cases, these are the steps you’ll need to take.
Steps to Refinance Your Mortgage
To ensure you get the best out of your refinance, follow these important steps.
Step 1: Set a Financial Goal
Before refinancing your mortgage, it’s important to track mortgage rates and real estate trends. Just because rates are low, doesn’t mean you’ll save money. Like your traditional mortgage, refinancing comes with upfront costs.
Do you know your target interest rate that will save you money? Using our online refinance calculator, you can determine how much money you’ll save each year in interest with a lower rate.
Step 2: Get Your Finances in Order
Much like your original mortgage, there are certain factors that must meet requirements for refinancing, such as credit score, home equity, and debt-to-income ratio.
The better your credit score, the better your chances are of a lower interest rate. Most refinancing applicants need to have a score of 620 to qualify, but there are programs that allow lower scores. Not only is it important to have a higher credit score, but you also need to keep your debt-to-income ratio low and not open any new lines of credit.
The only way to cash out refinance is to have enough equity in your home. To find the exact equity, you must have an appraiser come to your home. From there, the lender will determine the equity you have to borrow against.
Step 3: Shop Multiple Lenders
Don’t settle for just one lender! When you shop multiple lenders, you’ll not only save money, but you’re more likely to get a better interest rate and better loan terms.
Many lenders will offer a free rate quote either online or by phone after you’ve provided details like an approximate credit score, loan amount, length of your loan, and the type of refinance you’re interested in. You can also check out our tools that allow you to shop for lenders.
Step 4: Appraise Your Home
The home appraisal is a vital step in refinancing because it determines what options are available to you. During the appraisal, an appraiser will come to your home and give an estimate on its value.
If the value of the home is higher than the loan you want to finance, then underwriting is complete, and you’ll be on your way to closing. If the estimate comes back lower, you’ll need to work with your lender to find an option that works best for you.
Step 5: Pay Closing Costs and Close on the loan
Once the home appraisal and underwriting are approved and complete, you’ll move to closing. Your lender will send a closing disclosure outlining the final loan estimate. It will also show how much money you need to pay upfront to close on the mortgage.
Use a Refinancing Calculator to Get a Free Quote
From a better interest rate and shorter term to a potentially lower monthly payment, there are several benefits of refinancing your home. However, the benefits you’ll experience truly depend on your unique situation and why you want to refinance.
Many borrowers enjoy the benefit of extra cash for remodeling, consolidating debt, and just having a little extra cash in the bank. Others reap the benefit of combining two mortgages into one, removing a person from a mortgage, or simply canceling mortgage insurance.
Regardless of why you want to refinance, it’s important to keep analyzing rates to ensure you get a good deal!
To help determine if refinancing your home loan makes sense, check out our refinancing calculator. You can include different rates and closing costs to determine when a refinance will save you money.
Get a free no-obligation mortgage refinancing quote from Guaranteed Rate by clicking here.
All Loan Compass visitors can waive lending fees when refinancing with Guaranteed Rate through our partnership.
For more information, contact one of our experts as Loan Compass.