How to refinance your mortgage, a step-by-step guide

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You may be like the thousands of homeowners who can’t resist these extremely low mortgage rates. And you fell in love with the idea of ​​shortening your term or lowering your monthly payments – potentially saving tens of thousands of dollars over time – by refinancing your loan.

Yet enduring all the research, paperwork, and scrutiny can seem daunting and overwhelming. You’re not alone.

Experts say many homeowners want to refinance, but deny it because they don’t understand the process.

“I think some people are initially intimidated by the refinancing process because they remember all the steps they had to go through to finance their home, that big pile of papers they had to sign, and are reluctant to do it again, ”said Jonathan Lee. , Senior Manager at Zillow Home Loans. “Really, refinancing is much easier than the buying process.”

Here’s a look at how to navigate the process and some smart ways to get the best deal:

What to expect in today’s market

Essentially, when you refinance a mortgage, you are paying off the mortgage you have and replacing it with a new one. The goal is to get a new loan at a lower interest rate and possibly with a shorter term loan. Ideally, the results would be a lower monthly payment and lower interest for the life of the loan.

If you’re considering swapping out a 30-year mortgage for a 15-year loan, “the payout is significantly higher,” says Greg McBride, senior vice president and chief financial analyst at Bankrate.com. “Look at your larger financial goals. Would you rather pay more into your 401 (k) plan for retirement than toward a higher monthly mortgage payment?

However, Lee says if you’re not saving on total interest over the life of the loan or on your monthly payment, then it’s not worth refinancing.

Another reason to refinance may be to take money out of your home. If you have sufficient equity in your property, you may want a cash refinance to use some of that money to pay off credit card debt or to complete home improvement projects, like a new roof or a home. addition. For example, if your home is worth $ 600,000 and you owe $ 200,000, your home equity is $ 400,000 ($ 600,000 – $ 200,000 = $ 400,000). You could refinance with a loan amount of $ 250,000 to get $ 50,000 in cash.

“We don’t see a lot of withdrawals,” says Joel Kan, associate vice president for economic and industrial finance at the Mortgage Bankers Association. “Auto loan interest rates are also low. If you have a good rate [on your current mortgage] it may not be worth refinancing just to get cash.

If you refinance on a shorter term, your monthly payment may be higher than it is now. However, “if you haven’t refinanced and want to take advantage of the lower mortgage interest rates and want the cash, you can refinance,” he says.

Be aware that lenders will recheck your employment and income before closing and will need current pay stubs as part of this process. This has been on the loan / refinancing chart for as long as 10 years, and continues to be part of it, in case one or both borrowers lose their jobs or their income.

Check your credit score

When refinancing your mortgage, you will need to qualify the same way you applied for your mortgage. To be ready, “know your credit status,” Kan says.

You can order a credit report from each of the three credit bureaus – Equifax, Experian, and TransUnion – to check your score and whether your information is correct. You can get a free copy of your credit score from annualcreditreport.com website. Credit reporting agencies can send you your credit scores or you can access them online.

Typically, you can only get one free credit report from one of the agencies per year. But due to the economic crisis brought on by the pandemic, the three agencies have agreed to provide a free weekly credit report until April 2022.

“If you have a score of 740 or higher, you’re in a good position to get the best rates,” McBride says. If your scores are below 660, you will usually be offered higher mortgage interest rates. If your scores are 620 or less, you may be limited to government refinancing programs, he says.

The Federal Housing Administration, part of the US Department of Housing and Urban Development, offers FHA refinancing options. Veterans receiving loans from the Department of Veterans Affairs may be eligible for a VA interest rate reduction refinance loan.

If you find derogatory information on the report, be sure to dispute and clean it up before applying for a loan. To improve your credit score, pay off credit cards in full and continue to pay off the balance in full each month. “Paying off or paying off debt” can improve your score, says Rod Griffin, senior director of consumer education and advocacy for Experian. Plus, wait until your loan closes before making any major purchases, says Zillow’s Lee.

Before you apply for refinancing, get your paperwork in order: tax returns, W-2, 1099, pay stubs that lenders may require. “Lenders look at two things: your willingness to pay, the likelihood of you paying, based on your credit history, and your ability to pay, by looking at your assets and income,” says Griffin.

Comparison store for the best rates and fees

There are different lenders to approach. For example, you can check with your current lender to see what they can offer. Also, you can try big banks like Bank of America, Chase, and Wells Fargo, as well as credit unions and other non-bank lenders like Rocket Mortgage and LoanDepot. Non-bank lenders issue more than half of all loan arrangements.

Check the mortgage rates of at least three lenders. Get rates in “real time,” says Lee. “Put it in writing. “

In addition to comparing rates, refinancing will include closing costs, and they’re usually lower than when you buy a home. “Look at the fees charged by the lender,” says McBride. “Comparison shop.”

To compare loan offers, you need to calculate the annual percentage rate for each loan you are considering.

The APR is the cost of borrowing money, including other fees, according to the Consumer Financial Protection Bureau. It reflects the mortgage rate as well as the fees you pay to get the loan.

A higher APR means you’ll pay more over the life of the loan. Use a loan comparison calculator, such as one online at Bankrate.com, to calculate the APR, for example, for three different loan offers.

Estimates of closing costs vary by state and municipality of the home. The lender’s estimates vary from 2% to 6% of the loan amount. However, since the cost of closing a loan can include state and local taxes, ask lenders what is included in the term “closing costs”.

According to ClosingCorp, a San Diego company that provides data on residential real estate closing costs for the mortgage and real estate services industries, the average closing costs for a single-family home refinance in 2020 were 3,398. $ taxes included and $ 2,287 excluding taxes. ClosingCorp’s refinance calculations include the lender’s title policy, valuation, settlement, registration fees, and various state and local taxes.

Average closing costs were less than 1% (0.87%) of the loan amount, excluding tax, according to the ClosingCorp report. Including tax, the average cost of refinancing was 1.29% of the loan amount.

Compare the total loan fees as well as a rate-to-rate comparison. “Compare apples with apples,” says Lee. And once you’ve found the right lender, “get 30-45 days real-time foreclosure.”

Check the gifts

Sometimes a lender will offer lender credits to cover the costs of closing your loan. Loans from lenders can increase your mortgage interest rate by a fraction of, say, 2.875% to 2.75%, but does not always increase your rate.

Lender credits depend on the loan-to-value ratio, which is the amount you borrow relative to the value of the property, the mortgage rate, and the lender’s willingness to be an incentive.

One point is 1% of the loan amount, and lenders may offer you a lower mortgage rate but with a fraction of a point or points attached. Make sure that when you compare rates, you are comparing the actual rates and any points associated with each rate offered by different lenders.

Even if the lender doesn’t offer a special promotion, ask for one anyway. Plus, don’t be afraid to negotiate a better deal, especially if a competitor can beat them. Depending on their interest in your business, they may be willing to play ball.


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