Refinancing 101: Six steps to refinancing your home5 Minutes
Wondering “Is it worth refinancing my mortgage”? Refinancing can help you lower your monthly mortgage payments, pay off your loan faster, or use your home equity for other purposes. Here’s a step-by-step guide to refinancing with confidence.
Refinancing a mortgage is the process of paying off your existing mortgage and replacing it with a new mortgage — without moving or selling your home.
If you want to refinance, here’s how you refinance a house. Remember, your mortgage loan officer can help you every step of the way.
1. Determine why you’re refinancing
There are three main benefits of refinancing your mortgage.
- To save money on monthly mortgage payments by getting a lower interest rate. If mortgage interest rates have dropped since you took out your loan, refinancing to a loan with a lower interest rate could make sense. You could lower your monthly mortgage payment and save thousands or even tens of thousands of dollars in interest charges over the life of your loan.
- To pay down a mortgage faster. If you took out a traditional, 30-year mortgage a few years ago, but now have a higher income, you might ask yourself, “How quickly can I pay off my mortgage?” By refinancing to a shorter term — say 15 years — you could cut years off your mortgage term. Refinancing over a shorter term reduces the amount you’ll pay in interest over the life of the loan, too.
- To use home equity for other purposes. If you’ve been paying down your mortgage loan for a few years or your property value has increased, you may have equity in your home. That means your house is worth more than the amount you owe on your mortgage. You can refinance by borrowing against that equity and receiving money when you close your new loan. You can then use that extra cash to fund renovations, pay off other debts, or pay for college, for example.
2. Figure out if refinancing is worth it
When is it worth it to refinance your mortgage? Here are some factors to consider:
- Will refinancing lower your interest rate enough to help you reach your goal? Check out the current mortgage refinance rates to see what kind of interest rates are available. If the new rate is lower than your current rate, refinancing could make sense.
- Will refinancing help you achieve other financial goals, such as eliminating higher interest rate debts or saving more for retirement? Sometimes people refinance because it frees up money each month for other financial priorities.
- How long will it take you to “earn back” your closing costs? Just like when you bought your home, refinancing usually involves closing costs. It’s important to understand how long it’ll take you to “earn back” your closing costs in the form of lower interest expenses or lower payments over a few years.
- How strong is your credit? If you haven’t checked your credit reports recently, it’s a good idea to review them before you apply to refinance and make sure they’re accurate. Mistakes or erroneous information could damage your credit, making it harder to refinance or resulting in higher interest rates. You can check your credit reports safely, for free, at AnnualCreditReport.com.
Your mortgage loan officer can help you make sure that refinancing is a smart move that will help you achieve your financial goals.
3. Gather your refinancing documents
Once you’re clear about why you want to refinance and are certain it’s worth it, it’s time to start the refinancing process.
Your application for refinancing will likely require a number of documents from you. Gather these documents first, as nearly every mortgage application requires them.
- Recent pay stubs showing year-to-date income
- Two years of tax returns
- Two years of W-2s
- Statements that show your asset accounts, which might include checking, savings, CDs, IRAs, stocks and bonds
- Records for any other real estate you own
- Your residential history for the past two years (address, landlord’s name and phone number, years lived there, etc.)
As you work with your mortgage loan officer through the application, there may be other documents you’ll need. Gathering these first will help streamline the process.
4. Start your mortgage refinancing application
Now it’s time to start your mortgage application. Your mortgage loan officer will explain what information you need to collect and your options.
The loan officer will also explain the process, how long it will take, and the costs and fees associated with financing. Your loan officer can help you make sure that refinancing is a smart move that will help you achieve your financial goals.
5. Processing and underwriting
Once you’ve submitted your application and the related documents, your mortgage team will be hard at work processing and underwriting your loan.
Sometimes there may be additional information to provide along the way, but your mortgage loan officer will let you know about that. Your mortgage team will also keep you informed of where your loan application is in the process.
6. Close on your new mortgage loan and enjoy the benefits
Once your loan application is approved and ready, you’ll “close” on the new loan. Your old mortgage will be paid off and the new loan will take its place.
As an added bonus, your first payment on your refinanced mortgage generally isn’t due for a full month following closing. Sometimes people call this “skipping a payment.”
After closing, you’ll be able to enjoy the lower payments, faster pace of paying off your mortgage, or extra cash to meet your other financial goals.
Ready to explore refinance? Contact one of our mortgage loan officer to learn more about getting a mortgage.