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How to Refinance Your Mortgage in 8 Steps

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Refinancing a mortgage involves replacing your current home loan with a new one. Homeowners might refinance to get a lower interest rate, shorter loan term or to change loan types.

Knowing how to refinance a mortgage, including the refinance process, costs, timeline and other factors, can help you better decide if it’s the right move.

What is refinancing?

A mortgage refinance is when you replace your mortgage with a new loan that has better terms, such as a lower refinance rate or monthly payment. A refinance may also involve shortening your loan term, eliminating private mortgage insurance or switching from an adjustable interest rate to a fixed rate.

How to refinance a mortgage in 8 steps

To refinance a mortgage, you go through a process similar to what you experienced when first taking out your loan. Here’s how to refinance a mortgage in eight steps:

1. Decide on your refinance goal.

A mortgage refinance should help you improve your financial picture. In lending terms, this is called a tangible net benefit. Set a clear goal upfront so you know exactly what you’re trying to achieve. Think about the following questions as you nail down your goal:

Establishing a goal for your mortgage refi will also help lenders better prioritize what you need when quoting mortgage offers.

2. Check your credit score and finances.

Pull your credit reports for free from AnnualCreditReport.com ahead of time and check your scores, too. If you spot errors on your credit reports, notify the credit agency in writing to correct them. Lenders will fully vet your finances, including your income, employment history, debts, assets and credit scores.

Generally speaking, you’ll need a minimum 580 to 620 credit score to refinance your mortgage, though a 740 credit score or higher can help you qualify for a more attractive interest rate. Your debt-to-income (DTI) ratio, or the percentage of your gross monthly income that is dedicated to repaying debt, shouldn’t exceed 43% in most cases.

3. Figure out how much equity you have.

In general, the more equity you have, the better your mortgage rate will be. You build equity over time by paying down your principal loan amount and/or because home values in your area have increased. To find your equity amount, subtract your current mortgage balance (and any other loans against the home) from your home’s current value.

For example, if your home is worth $250,000 and you owe $150,000 on your existing loan, you have $100,000 worth of home equity.

4. Shop around for a mortgage.

Apply for a refinance with three to five lenders within 14 days (and typically no more than 45 days, depending on which version of the credit scoring model each lender uses). During this time frame, multiple credit checks will count as a single credit inquiry on your report and won’t negatively impact your credit.

Look closely at the loan estimate (LE) from each lender to compare rates, closing costs, lender fees and other key loan terms.

5. Choose a refinance lender.

Once you’ve compared estimates, choose a mortgage lender who can help you best achieve your refinance goal. Before you settle on one, though, remember to ask each lender on your list several questions, including (but not limited to):

  • Which mortgage refinance programs do you offer?
  • How does your mortgage preapproval process work?
  • Will I need a home appraisal?
  • How much equity do I need in order to refinance?
  • What’s your loan origination fee?
  • What do your closing turnaround times look like?
  • Will you service my loan or likely sell it to another servicer after closing?

The LE should detail how much cash you’ll need to close, as well as the terms of your new mortgage.

6. Lock in your rate.

Make sure you lock your mortgage rate as soon as possible. Rates change daily, and the rate quoted to you yesterday may not be accurate today. Locking in a rate sooner rather than later guarantees that the terms you were quoted won’t change.

NOTE: If you don’t close on your refinance before your rate lock expires, you may have to pay a fee to extend the lock, which is added to your refinance closing costs.

7. Prepare for the property appraisal.

Unless you qualify to skip a refinance appraisal, your lender will order a home appraisal to determine your home’s value and calculate your available home equity. Make sure you tell the appraiser about any home improvements you’ve completed. It’s also a good idea to declutter and clean your home to make it as presentable as possible.

8. Close on your home refinance.

Ensure all of the details on your closing disclosure are correct, and make sure your closing costs — which typically range from 2% to 6% of your loan amount — haven’t dramatically increased from the loan estimate. You’ll pay closing costs and sign paperwork for your new loan, and your old loan will be paid in full by your new lender.

Should I refinance my mortgage now?

With historically low mortgage rates expected to stick around, many homeowners are asking, “Is refinancing worth it?” Refinancing should help you save money in some way. Here are some of the potential benefits of a refi to help you decide when to refinance your mortgage:

  • You’ll get a lower refi rate. A lower interest rate means you could save thousands in interest payments over your loan’s lifetime. It could also lead to lower monthly payments.
  • You’ll lower your monthly payments. By snagging a lower refinance rate or extending your loan term, you could reap monthly savings, freeing up more of your budget for other goals. However, keep in mind that resetting your loan term to a new 30-year loan will lead to more total interest paid.
  • You’ll have more stable mortgage payments. When ARMs reset, the interest rate can go up or down, and this can take borrowers by surprise in a rising rate environment when interest rates increase, driving up monthly payments. With a fixed-rate loan at current refinance interest rates, though, you’ll have stable payments for the life of the loan — and more peace of mind.
  • You’ll ditch mortgage insurance costs. Mortgage insurance can add up over the long term. If you have an FHA loan with the maximum financing option, mortgage insurance premiums cannot be canceled. The only way to remove it is to refinance into a conventional loan once you’ve gained 20% equity.

LendingTree’s mortgage refinance calculator can help you get an idea of the savings you might reap from replacing your current loan.

Home refinance FAQs

How does refinancing work?

In a home refinance, your new loan will pay off the old loan, and typically allow you to start over with a new rate and better terms. Lenders take your loan application and do a thorough check of your finances and credit (again) before providing you with a loan estimate that outlines the terms and costs of your new mortgage.

What is a cash-out refinance?

A cash-out refinance allows you to take out a new mortgage for more than what’s owed on your current loan by borrowing against your available equity. Once the old loan is paid off, you take the difference between the two loans in cash.

How much does it cost to refinance a mortgage?

There are three different types of closing costs to consider when refinancing a mortgage: lender fees, third-party fees and escrow costs, such as property taxes and homeowners insurance. These fees typically total about 2% to 6% of the loan amount.

Can I refinance my mortgage with no closing costs?

You can refinance a house without paying closing costs. A no-closing cost refinance doesn’t require any upfront closing fees, but that doesn’t mean you won’t pay for it. Your lender will either roll the closing costs into your mortgage by increasing your loan amount or offer you a higher interest rate. As a result, your monthly payments are higher for the life of the loan.

What credit score do I need to refinance a mortgage?

The credit score you’ll need for a mortgage refinance will vary by loan program. For a conventional rate-and-term refinance, you’ll need at least a 620 credit score, while a minimum 580 credit score is required for an FHA loan. There’s no minimum score required to refinance a VA loan, but most lenders prefer at least a 620 score.

Can I refinance a mortgage with bad credit?

You can refinance a mortgage with bad credit, but your options are limited for a conventional rate-and-term refinance. Some government-backed loan programs, like FHA loans and VA interest rate reduction refinance loans (IRRRLs), offer refinance options to eligible borrowers who may not have stellar credit. You may also work with an alternative or nonprime lender if you have bad credit, or simply wait until you improve your credit score to refinance your home.

What is a break-even point?

You want to stay in your home long enough to recoup your mortgage refi closing costs, which is typically a few years. This is known as reaching the break-even point, or when the monthly savings from a home loan refinance offsets the costs. To calculate the break-even point, divide the monthly savings by the total refinance costs. The result will tell you how many months you need to stay in your home to recoup those costs.

Is it better to refinance with the same lender?

You can certainly refinance with the same lender, but shop around first to ensure you’re getting your best mortgage refi rates. Compare loan estimates from your current lender and at least two other companies to evaluate their refi rates, closing costs and lender fees. If you choose to work with your current lender, scrutinize the new loan agreement carefully so you fully understand the loan terms.

Should I refinance into another 30-year fixed loan?

The answer to this question depends on your financial needs. If your current monthly mortgage payment is no longer affordable, for example, extending your repayment period to a 30-year term to reduce your monthly payment amount could make sense. However, if you choose this option for your refi, expect your overall interest costs to increase.

If you want a mortgage with a repayment term that isn’t quite as long as 30 years but more than 15 years, you may qualify to refinance without starting over.

Is a refinance required to remove someone’s name from my loan?

If you get a divorce or otherwise need to remove a co-borrower from a mortgage, a home loan refinance is the only way to do it. This frees the co-borrower of the financial liability to the mortgage, but it doesn’t remove their name from the title of the home, which is a separate process.

 

Today's Refinance Rates

  • 2.62%
  • 2.13%
  • 2.56%
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