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How to Refinance Your Mortgage in 10 Steps

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To refinance a mortgage, you replace your current home loan with a new one. Homeowners often refinance to get a lower interest rate, pay off their loan faster or convert their equity to cash.

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

What is a mortgage refinance?

A mortgage refinance is when you replace your mortgage by paying it off with a new home loan. Homeowners typically refinance to get a lower interest rate or monthly payment. However, a refinance may also involve shortening your loan term, eliminating mortgage insurance or switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan.

Additionally, if you’ve built up home equity over the years, you can convert that equity to cash with a cash-out refinance.

How to refinance a house in 10 steps

In most cases, you’ll follow the same steps you took to get the mortgage you’re paying off. Here’s how to refinance a mortgage in 10 steps:

1. Decide on your financial goal

A mortgage refinance only makes sense if it improves your financial situation. Lenders call this a “net tangible benefit.” In fact, lenders are required to prove there’s a financial benefit to approving your refinance. Set a clear goal, asking yourself the following questions so you know exactly what you want to achieve:

  • Do you want a lower monthly mortgage payment?
  • Would you like to pay off your loan faster by switching to a shorter term?
  • Is it time to make some home improvements or upgrades to your home?
  • Could you benefit from paying off high-interest credit card debt?
  • Can you get rid of your monthly mortgage insurance?

Knowing your mortgage refi goal will help lenders quote you an accurate rate based on your financial priorities.

2. Check your credit score

Your refinance credit score is the most important factor regarding the rate a mortgage lender offers. Although you only need a minimum score between 580 and 620 for most refinance programs, a 740 credit score (or higher) may help you snag a mortgage at an attractive interest rate.

You can pull and check your credit reports for free from AnnualCreditReport.com. Notify the credit agency in writing to correct any errors you spot on your reports.

3. Figure out how much equity you have

Home equity is the difference between your home’s value and how much you owe on your current mortgage. For example, if your home is worth $350,000 and you owe $200,000, you have $150,000 worth of home equity.

In general, the more equity you have, the better your mortgage rate will be. You can use a home value estimator to get an idea of your home’s value, or ask a real estate agent to prepare a comparative market analysis (CMA).

4. Finalize your refinance type

Once you know your refinance goal, credit scores and have a rough idea of your home’s worth, it’s time to determine which refinance program is the best fit before you start loan shopping.

There are three refinance loan types: a rate-and-term refinance, cash-out refinance and streamline refinance.

Rate-and-term refinance. This type of refinance is the most common if you just want to lower your payment, switch loan programs (refinancing from an FHA to a conventional loan, for example) or adjust your loan term. Closing costs can typically be added to the loan amount and you don’t need a lot of home equity to be eligible.

Streamline refinance. You may be eligible for a streamline refinance if you currently have a loan backed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). The big benefit: You don’t typically need to provide income documents or pay for an appraisal.

Cash-out refinance. You can borrow more than you currently owe and pocket the difference with a cash-out refinance. However, you usually can’t borrow more than 80% of your home’s value.

5. Pick the right loan program

The final step before you start lender shopping is to pick the right loan program. Here’s a quick overview of the most common refinance programs:

Conventional refinance loans. Fannie Mae and Freddie Mac set the guidelines for conventional loans, and they are the most popular mortgage loan for buying and refinancing. You can avoid mortgage insurance if you have 20% equity in your home.

FHA refinance loans. Homeowners with scores as low as 500 may be able to refinance with an FHA loan. However, FHA mortgage insurance is required regardless of your equity amount. 

VA refinance loans. Eligible military borrowers may be able to borrow up to 100% of their home’s value with a VA rate-and-term refinance, or 90% with a VA cash-out refinance.

USDA refinance loans. Borrowers in rural areas with current USDA loans can lower their payment. However, cash-out refinances aren’t allowed.

Use the table below as a quick reference guide for the mortgage refinance requirements and find the best fit for your finances:

Refinance loan programBest for
Conventional rate-and-term refinanceHomeowners with high credit scores, solid income and at least 3% home equity
Conventional cash-out refinanceHigh-credit-score borrowers with at least 20% equity who want to avoid mortgage insurance
FHA rate-and-term refinanceBorrowers with credit scores as low as 580 and less than 3% equity
FHA cash-out refinanceHomeowners with credit scores as low as 500 who need to consolidate debt
FHA streamline refinanceHomeowners with a current FHA loan who want to skip income and appraisal documentation
VA rate-and-term refinanceEligible military homeowners who need to finance up to 100% of their home’s value
VA cash-out refinanceVA-eligible borrowers who want to tap equity up to 90% of their home’s value
VA interest rate reduction refinance loan (IRRRL)Homeowners with a current VA loan who want to skip income and appraisal documentation
USDA streamline refinanceRural homeowners with a USDA loan who want to lower their payment without income or appraisal requirements

6. Shop around for a mortgage

Apply for a refinance with three to five lenders, and look closely at each loan estimate to compare closing costs, rates, lender fees and the terms of the loans offered. Make sure you collect them all on the same day — like stocks, interest rates change daily.

You won’t need to worry about hurting your credit scores if you complete your shopping within 14 days (and typically no more than 45 days, depending on which 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 further impact your credit.

7. Choose a refinance lender

Once you’ve compared estimates, choose a mortgage lender who can help you accomplish your refinance goal. Before you settle on one, ask each lender the following questions:

  • Which mortgage refinance programs do you offer?
  • Do you specialize in any particular type of refinance program?
  • How does your mortgage process work?
  • Will I need a home appraisal?
  • Do I need to pay any fees upfront, or can they all be rolled into my loan?
  • How long will it take to complete the refinance?
  • Will I make payments to your company after closing or will you sell my loan to another servicer?

8. Lock in your interest rate

You should lock in your mortgage rate as soon as possible to avoid any change from your quoted rate. Locking in means the lender guarantees the terms that were offered won’t change.

NOTE: Keep track of your lock expiration date. If you don’t close before the rate lock expires, you may have to pay an extension fee that will be added to your refinance closing costs.

9. Prepare for the property appraisal

Unless you qualify for an appraisal waiver or are eligible for an FHA streamline, USDA streamline or the VA IRRRL, 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.

10. Close on your home refinance

Check all the details on your closing disclosure to ensure your closing costs 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.

Why you should refinance

Refinancing should help you save money or allow you to use your home equity to achieve other financial goals. In general, you should refinance if:

  • 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. Extra monthly savings from snagging a lower refinance rate or extending your loan term could free up more of your budget for other goals. However, keep in mind that starting over with a new 30-year loan will lead to more total interest paid.
  • You’ll have more stable mortgage payments. When adjustable-rate mortgage (ARM) rates reset, the interest rate can increase, which could make your payment unaffordable. With fixed-rate loans, 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 can’t be canceled. The only way to remove them is to refinance into a conventional loan once you’ve gained 20% equity.
  • You can tap equity to clear out room in your total monthly budget. Credit card debt can get out of control with high, variable rates, and a cash-out refinance can give you payment relief. An added bonus: Reducing your credit card balances may boost your credit scores.
  • You can use extra cash to make improvements to your home. The right home improvements can add value to your home or keep it up-to-date so you get top dollar if you plan to sell your home in the future. Check out fixer-upper loans if your main goal is to spruce your home up — the lender will approve your loan based on the “after-improved” value of your home.

How to use a mortgage refinance calculator

Try LendingTree’s mortgage refinance calculator to get an idea of the savings you might realize by replacing your current home loan. With basic information about your credit scores, home’s value and your current loan balance, you can start crunching some basic refinance numbers.

Frequently asked questions

There are three types of refinance 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. 

Yes, if you request a no-closing-cost refinance option. Your lender will either roll the closing costs into your mortgage by increasing your loan amount or offer you a higher interest rate. The drawback: Your monthly payments are higher for the life of the loan. 

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. 

You can refinance a mortgage with bad credit, but you’ll probably be limited to government-backed loans if your credit scores are below 620. 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 non-qualified mortgage lender if you have bad credit, or take steps to improve your credit scores before you refinance your home.

Refinancing only makes sense if you’ll recoup your mortgage refi closing costs, which typically takes a few years. In lender terms, this is called your break-even point, and it’s a measurement of how many months or years it takes for your refinance savings to offset the costs. To calculate the break-even point, divide your monthly savings by the total refinance costs. The result tells you how many months you’ll need to stay in your home to recoup those costs. 

Before you refinance with the same lender, shop around first to ensure you get your best mortgage refi rates. Compare the refi rates, closing costs and lender fees from your current lender and at least two other companies. 

If your current monthly mortgage payment is no longer affordable, 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, you’ll pay more interest over the life of the loan.

If you get a divorce or need to be removed as the co-borrower from a mortgage, a home loan refinance is the only way to eliminate your responsibility for future payments. However, if you originally qualified for the loan with a co-borrower, you’ll need to prove you can afford the loan on your own.

 

Today's Refinance Rates

  • 5.56%
  • 5.18%
  • 3.31%
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