Mortgage Refinance Tips: 10 Steps to Success

A mortgage refinance replaces your current mortgage with a new home loan, typically with a lower interest rate. You can also tap home equity with a cash-out refinance to pay off credit cards with high interest rates or make home improvements.

The following refinance tips will help you navigate the refinance process and choose the best option for your financial goals.

10 mortgage refinance tips

A mortgage refinance can save you money, but there are costs involved and the process is slightly different from getting a mortgage to buy a home. The following mortgage refinance tips will help you set realistic goals and select the right type of mortgage refi to accomplish them.

1. Decide on a refinance goal

Before you refinance your mortgage, know why you want to refinance. Some common goals for a mortgage refi include:

• Lowering your interest rate and monthly payment
• Paying your loan off faster with a shorter term
• Switching from an adjustable-rate mortgage to a fixed-rate mortgage
• Dropping mortgage insurance premiums by switching from a Federal Housing Administration (FHA) loan to a conventional loan
• Tapping home equity for debt consolidation, home improvements or to pay for college education

In the mortgage lending world, these goals are called net tangible benefits, meaning they help improve your overall financial health.

2. Decide which mortgage refi purpose is best for you

Once you know your financial goal, you can zero in on which type of refinance suits your needs. This is known as the “purpose of refinance” on your loan application. Here’s a rundown of each:

*The funds you receive in a limited cash-out refinance are capped at 2% of your new loan amount or $2,000, whichever is less.

3. Determine if you have enough equity to refinance

Your home equity is the difference between your home’s value and how much you currently owe on your mortgage. Your refinance lender will typically order a home appraisal to verify your home’s value, but you can use a home value estimator to get a rough idea.

In most cases, you’ll need equity to refinance your home, but the amount depends on the type of loan you’re taking out and the purpose of your refinance. You’ll need more equity for a cash-out refinance than a rate-and-term refinance.

There are several government-backed refinance programs that don’t require an appraisal at all. You may also be eligible for an appraisal waiver on a conventional mortgage if you have enough equity.

The table below shows how much equity you need based on your loan purpose and loan program.

4. Check your credit score, your LTV ratio and your DTI ratio

Home refinance requirements are similar to the minimum mortgage requirements you needed to meet when you bought your home. The most important factors impacting refinance interest rates are your credit score and loan-to-value (LTV) ratio. However, if you exceed the debt-to-income (DTI) ratio requirements, you may not be approved for a refinance loan at all.

Credit score. A credit score above 740 will snag your best rates. However, refinancing may still make sense if you have a credit score of:

• 580 for an FHA refinance
• 620 for a conventional refinance
• 620 for a VA refinance at many lenders (although the VA doesn’t have a minimum refinance requirement)
• 640 for a USDA refinance at many lenders (although the USDA doesn’t set a refinance minimum score)

LTV ratio. Your LTV ratio is a measure, expressed as a percentage, of how much of your home’s value you’re borrowing. Usually, the lower your LTV ratio, the lower your interest rate. You can calculate your LTV ratio by dividing your new loan amount by your home’s value.

DTI ratio. Studies show keeping your DTI ratio at 43% makes it more likely you’ll be able to repay your loan, according to the Consumer Financial Protection Bureau. Mortgage refi lenders may allow a DTI ratio of up to 50%, but only if your credit scores are on the higher side. One caveat: If you need private mortgage insurance, you may pay a higher premium if your DTI is above 45%.

5. Gather your paperwork

If you’re not eligible for a streamline refinance, you’ll need to gather up some financial documents to get the refinance process going. Have the following paperwork handy:

• Bank statements for the last 60 days
• Pay stubs for the past month
• W-2s for the past two years
• Recent contact number(s) for your employer(s) the past two years
• Retirement statements
• Documentation of other income sources like alimony, child support or Social Security
• A copy of your homeowners insurance policy
• Your current monthly mortgage statement

6. Get quotes from at least 3 lenders

Data from LendingTree show that comparison shopping pays off, and gathering quotes from three to five lenders is a good general rule of thumb. Ask for lender recommendations from friends, family members and colleagues or check out lender reviews. Reach out to your current lender to see what they’re willing to offer.

You can also use an online rate comparison tool and input your financial details and purpose for refinancing. You’ll be matched with several lenders who will call you with their best offers based on the information you provide.

Whether you call on your own or use an online comparison site, be sure you:

• Compare all the rates on the same day (rates change daily)
• Compare lender fees with each lender, including origination fees, discount points, lender credits, title insurance and escrow/attorney’s fees
• Remember ongoing property costs will be the same regardless of lender, including:
  • Escrow accounts for property taxes, homeowners insurance and prepaid interest
  • Recording fees

  7. Prepare for a home appraisal

  Most lenders require a home appraisal to justify your refinance loan, since your home is the collateral for the new mortgage. An appraisal is an unbiased opinion of your home’s value based on the expertise of a licensed home appraiser.

  If the appraisal comes into too low, you may have to:

  • Make up the difference in cash
  • Pay a higher interest rate
  • Pay a higher private mortgage insurance premium
  • Receive less cash back
  • Cancel the refinance

  To present your home in the best light it’s a good idea to:

  • Be present during the appraisal to answer questions about the unique features of your home
  • Provide receipts and documents for any upgrades and renovations
  • Tidy up your home and remove clutter
  • Spruce up your yard so your home looks nice from the outside

  8. Calculate your breakeven and decide how you want to pay closing costs

  You’ll shell out 2% to 6% of your loan amount to pay for mortgage refinance closing costs. There are three ways you can pay for them:

  1. Roll them into your loan by increasing the amount you borrow
  2. Raise your rate and get a lender credit to cover the costs (often called a no-closing-cost refinance)
  3. Pay the costs out of pocket

  If you decide to finance refi closing costs with a higher rate or loan amount, remember you’ll pay more in interest charges over the life of the loan.

  Use a mortgage refinance calculator to calculate your breakeven or just do the calculations yourself. The break-even point is the amount of time it takes to recoup the cost to refinance your mortgage. Here’s a quick example, assuming you pay $7,500 in refinance costs to save $125 per month:

  • Divide $7,500 worth of costs by $125/month savings ($7,500/$125 = 60)
  • It would take you 60 months — or five years — to break even
  • If you plan to stay in your home for longer than five years, the mortgage refi makes sense

  9. Lock in your mortgage rate

  Another good mortgage refinance tip is to lock in your interest rate early. Refi loan rates change daily and until you lock one in, your rate is not guaranteed. A mortgage rate lock secures your interest rate for a set time period — typically 30 to 60 days. If your refi rate is locked, you’ll know exactly how much your principal and interest is at your closing.

  One other refinance tip related to locking your rate: Write down the lock expiration date on your Loan Estimate and keep track of it. If you don’t complete your refinance by that date, you could be stuck with an extension fee.

  10. Plan ahead for the refinance closing process

  Although the refinance process may take 30 to 45 days from start to finish, you’ll want to be prepared to act quickly if needed. Lenders using digital application processes may be able to close faster.

  You’ll receive a closing disclosure three business days before your signing date to finalize the figures and make sure the details are correct. However, federal law requires an extra three-day waiting period after you sign, called a right of rescission, to make sure you are comfortable with the refinance loan terms. If you don’t cancel in writing during that time, your refinance will fund after midnight on the third business day.

  A few things to look out for after your refi closing:

  1. The outstanding escrow account balance from your current lender should be sent to you within 20 business days of closing.
  2. The first payment on your new home loan is typically due on the first day of the second month after closing.