How to Refinance a Mortgage: 7 Steps
When you refinance a mortgage, you replace your current home loan with a new one. Your goal might be to lower your monthly payments, convert some of your home equity to cash or switch to a new loan term. But refinances come with costs and fees, too, so you’ll need to weigh the benefits against these costs.
We’ll cover how a refinance works, as well as how to get the best refinance rates to help you move forward with a plan that’s right for you.
When you refinance, you’re swapping out your current mortgage for a brand-new one. Once the refinance is final, your old mortgage gets paid off and your new one kicks in with whatever terms you agreed to.
The main difference is you already own your home, so you’re refinancing to reach a specific financial goal like lowering your monthly payment or getting cash out. You’ll choose your lender and loan type based on the financial goal you’re trying to hit, and do some basic calculations to make sure that it’s a good financial move. (We’ll show you which calculations to choose below.)
The process is pretty similar to when you borrowed your original mortgage: You’ll need to shop around for rates, apply and go through underwriting again. Depending on the refinance program, you might have to submit all of the same information you did when you purchased the home. Or, you may qualify to skip the home appraisal and income verification steps.
How to refinance your mortgage in 7 steps
1. Determine your financial goal
Common refinance goals include:
- Lowering your interest rate
- Reducing your monthly mortgage payment
- Paying off your mortgage faster
- Changing an adjustable-rate mortgage to a fixed-rate mortgage
- Borrowing equity to pay off high-interest debt or finance home renovations
- Altering your loan term (to be longer or shorter)
- Switching from an FHA loan to a conventional loan
- Removing someone’s name from the mortgage
2. Pick a strategy
You need to understand which levers you can pull to achieve each of these goals. The table below gives a quick overview, but if you need more guidance, consider reaching out to a housing counselor.
| Your refinance goal | How to achieve it |
|---|---|
| Lowering your interest rate |
|
| Reducing your monthly mortgage payment |
|
| Paying off your mortgage faster |
|
| Changing an adjustable-rate mortgage to a fixed-rate mortgage |
|
| Borrowing equity to pay off high-interest debt or finance home renovations |
|
| Altering your loan term (to be longer or shorter) |
|
| Switching from an FHA loan to a conventional loan |
|
| Removing someone’s name from the mortgage |
|
Need more help? Find a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD). They’re typically low-cost or free, and will have your best interests at heart.
3. Assess your finances
Once you have a rough idea of what you want to do, take an inventory of your finances. A refinance may not be worth it — or even possible — if you can’t meet the requirements for the program you want to use. Your credit score, income and debt will all need to be up to the task.
You’ll usually get the best interest rates if you have:
- A 780 credit score or higher
- You’re borrowing no more than 75% of your home’s value
- Your monthly debts don’t exceed 35% of your income
If you want to take cash out, you’ll also need a significant amount of home equity to qualify. Typically, you need to maintain at least 10% to 20% equity after you take out the refinance loan. And, the more equity you have, the better your rate will be.
4. Shop around for refinance loan offers
With your refi plan taking shape, you’re ready to take the next steps to pick the right loan program and refinance lender.
- Pick the right refi type and program for your refinance goals. Use our table below to find the best type of refinance for you. Before you start calling lenders, make sure you’re asking them for a rate quote on the loan type and program that matches your finances. If you currently have an FHA, VA or USDA loan, you can skip the home appraisal and income verification steps with an FHA streamline refinance, VA interest rate reduction refinance loan (IRRRL) or USDA streamline refinance.
- Shop around. The data is clear: recent LendingTree studies show that borrowers who shop around for a mortgage save thousands of dollars in interest and closing costs. Gather loan estimates from at least three to five lenders, and see which one can offer you the best deal. Remember: Rates change daily, so gather all of your quotes on the same day for a true apples-to-apples comparison.
Types of refinance loans
| Refinance type or program | Choose this refinance if: |
|---|---|
| Rate-and-term refinance | You want to lower your rate or reduce your loan term and roll the closing costs into your loan |
| Streamline refinance | You currently have an FHA, VA or USDA loan and want to refinance without providing income documents or paying for an appraisal |
| Cash-out refinance | You want to borrow more than you currently owe and pocket the cash difference for home improvements, debt consolidation or another large expense |
| Renovation refinance | You want to roll the cost of major home improvements into one loan and borrow the money based on your home’s after-improved value |
Overwhelmed? Read more about these and other refinance options.
5. Run the numbers
It’s important to calculate your refinance break-even point, which is the number of months it will take to recoup your refinance costs. LendingTree’s refinance calculator can do this for you automatically.
The break-even point shows you whether a refinance makes financial sense. If you sell your home before or right at that break-even point, you won’t save any money — and you could actually lose some. But even if you’re planning to stick around past the break-even point, that doesn’t mean you should automatically refinance. Think about how much longer you’d need to stay to make the whole thing really worth your while.
Additional calculations to assess your refinance
Beyond the break-even point, here are four other key calculations you might want to do as you assess your financial situation:
- Monthly savings. Figure out exactly how much your monthly payment will change after factoring in the new principal, interest, taxes and insurance amounts. Don’t forget that property taxes and homeowners insurance costs might have changed since you first bought the home, especially if you’re switching into a conventional loan that will require private mortgage insurance (PMI).
- Total interest savings over the life of the loan. Compare how much total interest you’ll pay on your current loan versus the new one. Sometimes a lower monthly payment doesn’t mean you’ll save money overall, especially if you’re extending your loan term.
- Cash-out considerations. If you’re taking cash out, factor in how the larger loan balance affects your monthly payment and total interest costs. Plus, consider what you’ll do with that cash — will it generate returns that might justify the higher mortgage costs? Or, if you’re using the cash to pay off debt, does this fit into your debt payoff strategy?
- Opportunity costs. Consider what else you could do with the money you’re spending on closing costs. Could you invest it elsewhere for a better return than what you’re saving on your mortgage?
You’ll typically pay between 2% and 6% of your loan amount toward closing costs. For example, if you refinance a $200,000 mortgage, your total closing costs might be in the ballpark of $4,000 and $12,000.
Learn more about how much it costs to refinance.
6. Request a mortgage rate lock
Your rate isn’t guaranteed until it’s locked in. Frequently asked questions about mortgage rate locks include:
-
How do I lock my interest rate?
Once you’ve chosen a lender, ask them to lock in the quoted rate. The lender will request the lock and send you an updated loan estimate confirming the lock. Keep track of the lock expiration date — if your loan doesn’t close by then, you might be on the hook for lock extension fees. -
How long should I lock in my rate?
Most lenders offer rate locks of up to 60 days. However, the shorter the lock, the better the rate, so get your paperwork in quickly and stay in contact with your loan officer during the refinance process. -
Can my rate change after it’s locked?
Yes. Some common reasons include a lower-than-expected appraisal value, a change in your credit score or a loan program switch.
Don’t know your credit score? Get your score for free on LendingTree Spring today.
7. Plan for your closing
Your lender must send you a closing disclosure at least three business days before you close. Look it over carefully to make sure the interest rate, closing costs and property details are right.
After you sign at closing, you get another three days to change your mind without penalty. This is called your “right of rescission.” If you decide the refinance isn’t worth it, you can cancel anytime before midnight on the third day. If everything looks good and you don’t cancel, your old mortgage gets paid off and your new one starts up.
How to get the best refinance mortgage rates
- Boost your credit score to 780 or higher. Keep your credit balances low and pay everything on time.
- Borrow less equity. Borrowing less of your home’s value will likely snag you a better rate.
- Consider an adjustable-rate mortgage (ARM). If you plan to move in a few years, an ARM loan features a lower fixed rate for an introductory period that could save you money while you’re preparing to sell your home.
- Pick a shorter term. You’ll typically get a lower rate if you choose a shorter term, such as a 15-year mortgage. It will, however, come with a monthly payment that’s likely several hundred dollars higher than with a 30-year repayment term.
- Pay for mortgage points. One mortgage point equals 1% of your loan amount, and paying for points can buy you a lower interest rate.
- Shop with three to five lenders. Homeowners who compare offers from at least three to five lenders often get the lowest rates.
Compare mortgage rates from top lenders in minutes
Frequently asked questions
Yes, you can lower your monthly payment without refinancing. You may want to get a mortgage recast, shop around to save on homeowners insurance, dispute your property tax bill, rent out part of your home or get a loan modification.
You can refinance a mortgage with bad credit but should expect to pay a higher interest rate. FHA loans allow you to refinance with a score as low as 500 and a minimum 10% in home equity. If you’re eligible for a VA refinance, there’s no minimum credit score requirement, although lenders often set their own guidelines to at least 620.
Because refinance lenders check your credit, you might see a temporary dip in your score of up to five points. Try to do all of your shopping within a 14-day period to avoid a bigger drop because of multiple credit inquiries.
Conventional lenders typically don’t set a minimum waiting period for a rate-and-term refinance after you close, but you must wait at least six months if you choose a cash-out refinance. FHA refinance programs require that you wait at least six months to be eligible, and 12 months if you’re taking cash out. For more info, check out our guide to how soon you can refinance.
If you don’t qualify for a refinance, a mortgage loan modification may be your best or only option. Lenders usually won’t modify your loan unless you’re already delinquent, however.
Get Free Refinance Offers Now
Read more
Should I Refinance to a 15-Year Mortgage? Updated July 17, 2024 Refinancing into a 15-year mortgage can save you money over the life of the loan,…Read more
Understanding Mortgage Refinance Requirements Updated May 26, 2023 Before you refinance a mortgage, know the key mortgage refinance requirements for major loan types.Read more