How to Refinance a Home Mortgage

Why and when you should refinance your mortgage

The first thing to do when considering if you should refinance your mortgage is to figure out why you want to. This goal should stay at the forefront of your mind throughout the process.

• Reduce your monthly payment by getting a lower interest rate
• Extract cash via a cash-out refinance
• Get a shorter term to pay off the loan faster by refinancing your 30-year mortgage to a 15-year mortgage
• Eliminate mortgage insurance if you’ve accumulated at least 20% of your equity
• Switch from an adjustable-rate (ARM) to a fixed-rate mortgage if you think interest rates could go up in the future

How to refinance your mortgage: Step by step

1. Set a financial goal
   Decide which of the above “whys” you’re trying to achieve. You should have a good reason for refinancing.
2. Check your credit score and history
   In the same way that you had to qualify for your original mortgage, you’ll need to be approved for a refinance as well. As with all loans, the better your credit score, the better your chances of being approved. And the more likely you are to get favorable terms.If you know you have a poor credit score, spend time boosting your credit score before starting this process.
3. Figure out how much home equity you have
   To determine how much home equity you have, subtract your estimated mortgage balance from your estimated home value. Or, simply use our mortgage refinance calculator. Banks and lenders will consider you less risky if you have more home equity. Typically 20% is the goal to get better rates and lower fees.
4. Shop for the best rate
   Get a loan estimate from different lenders. This document details the terms of the loan, projected payments, estimated closing cost, and any other potential fees involved. Put our mortgage refinance calculator to work again when comparing each lender.
5. Choose a lender
   You can save a good chunk of change by choosing the right lender. On top of interest rates, keep an eye on other fees and see whether they’ll be due upfront or added to the balance of the loan. Apply with each lender in a two-week period to avoid a potential hit to your credit score.
6. Lock in your interest rate
   Try to lock in an interest rate before the loan closes so you won’t be affected by potential rate changes.
7. Prepare for the appraisal
   Depending on the lender, you may need to have your home appraised to determine the value for a refinance. Make note of any upgrades you’ve made to your home since purchasing the house as that can help you get a higher appraisal. Many factors go into home appraisals, but on average it costs about $300 to $450.
8. Close on the loan with cash if needed
   Closing on a refinance is comparable to closing on a typical purchase loan. The closing disclosure and loan estimate will break down how much you owe out of pocket to close.Though you might be able to finance these costs, it’ll hurt down the road with a higher loan amount and the possibility of higher interest rates.
9. Track your loan
   You may be able to save yourself money by setting up autopayments on your loan. Many lenders offer lower rates for autopay. Your lender can resell your loan to a different company on the secondary market. Keep track of paperwork that could indicate such a sale.

Risks of refinancing your mortgage

Refinancing can be beneficial, but there are risks involved too. If you can’t get a significantly lower interest rate or end up taking on a lot of fees, refinancing isn’t the right move.

• Refinancing isn’t free. Make sure the total you’re saving in interest rates outweighs the cost to refinance. Determine exactly how long it will take for you to reach a point of breaking even. If there’s any chance you’ll move in that window, don’t refinance.
• If you pay off your balance early, you could face a prepayment penalty. Depending on how high that penalty is, you might be better off sticking with your original mortgage.
• Your total financing costs can go up. Refinancing to a new 30-year mortgage is likely going to lead to more interest and fees over the course of your loan.

Alternatives to refinancing

Homeowners who’ve built up enough equity can consider a second mortgage. Those looking for a small amount of cash for a short time might be better off with a personal loan or credit card.

Home equity loans

A home equity loan allows you to borrow against the value of your property and the equity you’ve built up in it by getting a lump sum upfront.

HELOCs

A home equity line of credit, or a HELOC, is a revolving line of credit comparable to a credit card. You get a line of credit based on the value of your home. You are then able to borrow what you need when you need it, paying the funds back over time.

Personal loans

Home equity loans and HELOCs both are secured loans, with your home acting as collateral. Most personal loans are unsecured. Your creditworthiness is the biggest factor in whether you are approved.

Credit cards

Credit cards are a quick way to get some spending money. But keep in mind that interest rates can be much higher on credit cards than on secured loans. That said, if you pay off the balance, you can avoid interest rates.

Differences between refinance and cash-out refinance

A no cash-out refinance, also called a rate-and-term refinance, is when you reset your interest rate or switch from an ARM to a fixed-rate mortgage. In this case, you essentially trade in your mortgage for a new one, presumably with better terms.

With a cash-out refinance, you rework your existing mortgage to be higher. You then use the loan to pay off the original mortgage and keep the difference. For this option, you typically need to have more than 20% equity in your home to qualify.