What you need to know to get your best deal on a refinance

Glossary Terms

Cash-Out Refinancing
A refinance in which the new loan amount exceeds the total needed to pay off the existing mortgage. The difference goes to the borrower and can be... <a href='/glossary/what-is-cash-out-refinancing' title='See the full definition of Cash-Out Refinancing '>read more</a>
Rate and Term Refinancing
A mortgage refinance that replaces the existing mortgage with a new one but does not disburse cash to the borrower. Rate and term refinancing is... <a href='/glossary/what-is-rate-and-term-refinancing' title='See the full definition of Rate and Term Refinancing'>read more</a>
Refinancing
Refinancing means replacing one loan with a new, better loan. Improving the terms of a loan can mean obtaining a lower interest rate, a lower monthly... <a href='/glossary/what-is-refinancing' title='See the full definition of Refinancing'>read more</a>

You don't have to earn a finance degree or work in a bank to pull off a mortgage refinance, and you shouldn't have to spend hours studying and worrying about it to get a good deal. This mortgage refinance guide will help you get it done and get back to your life.

Mortgage Refinance: 1, 2, 3

Refinancing a mortgage involves three simple steps:

  • Assemble your documents and information
  • Compare refinance options
  • Choose a refinance lender

Refinancing: Just Because You Can Doesn't Mean You Should

Before you undertake these steps, you need to answer the question: "Should I refinance?" Here are some of the most common reasons to refinance.

  • Pay less over the life of the loan
  • Reduce your mortgage payment
  • Trade home equity for cash
  • Drop mortgage insurance coverage
  • Get better loan terms

LendingTree's Refinance Breakeven Calculator is a great tool, because it shows you the difference between a new loan and your old one, and how long it would take for the savings generated to offset the cost of refinancing. It also compares the total interest expense of keeping your current mortgage with the total costs if you refinance.

Understand that unless you have an FHA or USDA home loan, you don't have to refinance in order to drop mortgage insurance. You can request cancellation in writing once the loan is at 80 percent of that value.

Finally, refinancing for cash out can be significantly more expensive than taking cash with a home equity loan. Compare both options before deciding.

Step 1: Documents and Information

There's no such thing as a "no doc" mortgage today, which means you'll have to document your income and assets when you apply for a mortgage refinance. Be prepared to supply two years of W-2s and two most recent pay stubs, or two years of tax returns and recent financials, if self-employed. To count any other income, like pensions or alimony, you'll have to prove that you receive it and that it will continue for at least three years.

You'll need statements for your investment, retirement and savings accounts. You should also know your credit score. Pull your report for free at annualcreditreport.com and purchase your scores, or get your VantageScore for free at LendingTree.

Step 2: Choose a Refinance Mortgage

There are many products available, and you'll want to narrow down your options before shopping for a mortgage. Here's what you'll need to consider:

  • Timeframe -- how long do you plan to keep your home?
  • Your goal -- lowest payment, least amount of interest, better terms?
  • Your qualifications -- equity, credit rating and income

Ignoring your timeframe could be expensive. That's because interest rates for 30-year fixed mortgages are significantly higher than those of hybrid ARMs, which have introductory rates that are fixed for three, five, seven or ten years. Blindly paying for a 30-year rate when you're only going to have the loan for five years could cost you. For example, as of this writing, a 5/1 is available at 2.625 percent, while its 30-year fixed counterpart is at 3.625 percent. If you refinance $300,000, the difference between the two payments is $163 per month, almost $10,000 over five years!

Your goal is important as well. Suppose you want to pay less over the life of your loan. You can do this by getting a lower mortgage rate or by shortening your term -- perhaps from a 30-year to a 15-year loan.

Finally, your qualifications -- credit, equity and income -- determine what programs you can consider. If you have little or no home equity, you'll probably be limited to government programs like HARP, FHA, VA or USDA loans. If your loan amount exceeds limits set by the government or Fannie Mae, you'll be looking for jumbo financing. How do you know what's out there for people like you? Try LoanExplorer by LendingTree. Simply input your qualifications -- loan amount, home value and credit rating (click "more options" for VA eligibility, bankruptcy filings and more). You'll see real loan offers from LendingTree lenders -- tailored to your inputs.

Step 3: Find Your Lender

Now that you've chosen your program, it's time to find a lender. That decision revolves around two factors -- mortgage rates and service.

Comparing mortgage rates and terms is pretty easy, and it's very important. A Stanford University study found that people who obtained quotes from at least four lenders saved thousands in loan fees.

Contact several lenders and ask them for written mortgage quotes. Try to get your quotes simultaneously if possible, because rates change all the time. You can do this in person or by telephone, but it's easiest to do online. At LendingTree, for example, you can complete one simple form and get up to five custom quotes from competing lenders, or scroll through LoanExplorer (offers can be sorted by interest rate, APR and more).

Your quotes should list all costs and fees, so you can make an accurate assessment. The interest rate and APR (annual percentage rate) should also be prominently displayed. Once you have a few finalists, it's time to contact the lenders.

When you speak to your lenders, pay attention to the way they treat you. Do they answer your questions in an easily-understandable way? If they suggest a product, do they explain their reasons? Do they return your calls right away (or your emails / texts if that's your preferred method of communicating)? You can peruse lender reviews and ratings at LendingTree to get the benefit of other borrowers' experiences.

Go!

You're now ready to go. You've got your documents in order, you've chosen your lender and your program. The hard part's over for you, and the rest is up to your loan officer, underwriter, appraiser and title company.

Lower your monthly payment

Lowering your monthly payments can loosen the belt on your household budget and allow you to focus on some other changes you might want to look into – like switching to a fixed-rate mortgage. Your lender will be able to help you address all the variables.

Lower your interest rate
If you’re not significantly paying down the principal, you could be throwing money away. By lowering your interest rate, you could conceivably pay off your mortgage faster while you’re chipping away at that principal, too.
Convert an ARM to a fixed-rate mortgage
Rather than waiting for the inevitable rate hike when your ARM matures, why not get locked into a rate you’re comfortable with right now? It pays to look into this so you’re not overpaying and overextending your budget.

Refinance rates now in Woodbridge, NJ[Change this]

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Home Price (Purchase)
When you get a mortgage to purchase a home, the lender uses the lower of the agreed-upon purchase price or the property's appraised value to determine your maximum loan amount. The loan amount divided by the property home price equals your loan-to-value ratio, or LTV. That ratio is one of the major factors that lenders use to set your mortgage rate. If your LTV exceeds 80 percent, you'll probably be required to pay mortgage insurance, which increases your monthly payment. If the property appraises for less than the agreed-on purchase price, you are not usually required to complete the purchase.
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Home Value (Refinance)
This is your estimate of the current value of your property. When you refinance, your home is almost always evaluated by a licensed appraiser. The refinance loan amount divided by the property's appraised value equals your loan-to-value ratio (LTV), and that number is one of the major factors that determine your mortgage rate. To get an accurate refinance rate quote, your home value estimate must be reasonably accurate.
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Down Payment
The down payment is the amount you pay upfront when you finance property. Your purchase price minus your down payment equals your mortgage amount. The higher your down payment, the more likely you are to be approved for a home loan. If your down payment is less than 20 percent of the purchase price, you'll probably be required to pay for mortgage insurance, which increases your monthly payment.
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Credit Score
Your credit score is a number designed to measure your credit-worthiness. It's based on a formula that combines many factors, including your payment history, amount of credit used and number of accounts. This number is used by lenders to calculate the probability that you'll default on your mortgage. Most lenders won't approve mortgages to applicants with credit scores lower than 620. Your credit score is one of the most important factors that determines your mortgage rate - applicants with higher scores are offered better mortgage rates.
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Mortgage rate quotes displayed on LendingTree LoanExplorer℠, including loan pricing data, rates and fees, are provided by third party data providers including, but not limited to, Mortech®, a registered trademark of Zillow®, LoanXEngine, a product of Mortgage Builder Software, Inc., and LoanTek, Inc.

Frequently Asked Questions

When does it pay to refinance a mortgage?

Any time you can get a no-cost refi with a lower interest rate, go for it – you have no break-even period, so the savings go straight to your bottom line. You can invest it, pay down your debts or accelerate your mortgage payoff.

Is it time to refinance your ARM?

As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin -- if they are different from those of your existing ARM, you may be comparing apples and oranges.

What are the basics of cash-out refinancing?

It is the process of taking out a new mortgage with a larger principal than your current mortgage. The difference in principal is paid to you as cash, which you can use for almost any purpose, including debt consolidation.

Would I like to refinance and take cash out?

VA allows cash-out refinancing A: to 100 percent of your home’s value (most lenders, however, limit cash-out refinancing to 90 percent). Most conventional programs (and FHA as well) limit cash-out refinancing to 85 percent or less. In addition, the added fees for cash-out refinancing with conventional lenders can run to several points, depending on your loan-to-value and your credit score. A VA mortgage may cost less. Note: all non-VA-to-VA refinancings are considered “cash-out,” even if you’re just paying off an old mortgage. In addition, free-and-clear homes cannot be refinanced with VA mortgages.

How do I get the best rate on my jumbo mortgage refi?

You’ll want to shop around. Find a good broker who not only knows where the programs are, but who also can tell you which lenders offer the best rates and are most likely to approve your application. Local real estate agents who list a lot of high-end homes who also know finances are also a good resource. Keep in mind, though, that a real estate agent’s main priority is that the mortgage gets approved and closed quickly. You can also look into a hybrid ARM improving your credit score in order to lower your loan’s interest rate.

Should you use cash-out refinancing?

If you have high interest debt that you want to pay off and you are able to rein in your spending, the answer may be yes. You may be able to use cash-out refinancing to get a much lower interest mortgage with a larger principal, where the difference is enough to pay off that credit card debt. Used wisely, that can be a smart move.

When does it pay to refinance a mortgage?

Any time you can get a no-cost refi with a lower interest rate, go for it – you have no break-even period, so the savings go straight to your bottom line. You can invest it, pay down your debts or accelerate your mortgage payoff.