Key Takeaways
- To refinance a mortgage, start by understanding your goals for getting a new loan.
- Research the different kinds of refinance loans available.
- Review your financial credentials and learn what you might qualify for.
- Apply for a refinance loan with a lender.
- Make sure you understand the costs of refinancing.
Refinancing a mortgage means getting a new home loan to pay off your existing mortgage. There are many possible reasons to refinance, including saving money by lowering your current interest rate, reducing monthly payments, or accessing cash from your equity. By refinancing, the total finance charges may be higher over the life of the loan.
The refinance process involves applying for a new home loan and making sure your financial credentials are in order. This guide will explain steps to best prepare you to refinance your mortgage.
1. Set Your Mortgage Refinance Goals
The first step in refinancing is to make sure refinancing makes sense for you, and to understand your goals for getting a new loan to pay off your existing mortgage. Here are some of the most common reasons why you may want to refinance.
- Lower your interest rate: If you can refinance to a new loan with a lower rate, you can potentially reduce your monthly payment. However, your overall finance charges may be higher over the life of the loan.
- Change your loan type: You may want to change from a variable-rate loan to a fixed-rate mortgage or change from an FHA loan to a conventional loan. A change in your loan type could give you more payment certainty or help you eliminate some costs, such as mortgage insurance premiums.
- Adjust your loan term: You could get a new mortgage with a longer or shorter repayment timeline (term) compared to your current loan. This can affect monthly payments and how long you are in debt.
- Access your equity: A cash-out refinance allows you to get a new mortgage for more than your current loan amount. You pay off your existing loan and you get the difference in cash to use for other things, like paying off higher-interest debt.
2. Research Types of Home Loan Refinances
There are different types of home loan refinances, including conventional, cash-out, and streamline options. To qualify for a refinance, you must meet specific requirements for that loan type. What’s best for you depends on factors such as your current loan type, your financial goals, your home’s value, and whether you have mortgage insurance.
| How It Works | Key Benefits | |
| Conventional Refinance | Usually requires both a credit check and a home appraisal | Can lower your interest rate, change your loan term, or remove private mortgage insurance (PMI) |
| VA IRRRL | Often no appraisal and limited or no credit underwriting required | Simplifies refinancing for eligible VA borrowers with less paperwork and potentially lower rates |
| FHA Streamline Refinance | Typically requires limited credit review and often no appraisal | Allows existing FHA borrowers to refinance quickly and potentially reduce monthly payments* |
| Cash-Out Refinance | Usually requires both a credit check and home appraisal | Lets you borrow against home equity and receive cash for expenses like renovations, debt consolidation, or major purchases |
3. Review Your Finances and Credit Report
You must qualify for a refinance loan, so you should review your financial profile to make sure you're likely to meet your lender's loan requirements. Some of the things to review include:
- Your credit record. See if there are errors on your credit report that could affect your ability to borrow. If so, contact the credit reporting bureaus to get them corrected. If you have negative information on your record, like a late payment, you may also want to write a goodwill letter asking your creditor if they could remove it if you've generally been a good borrower.
- Your employment history: Lenders usually are required to verify proof of stable employment when qualifying you for a mortgage. If you have changed jobs recently, it will be helpful to show a history of steady income.
- Your current debts: Make sure you are current on debt payments. If you have large loan balances and your payments are too high relative to your income, this may impact your ability to qualify for a mortgage refinance.
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4. Confirm Your Refi Eligibility
You must mee tyour lender’s mortgage refinance requirements in order to be eligible for a refinance loan. All of these factors can affect your loan approval.
- Credit score: Lenders want you to have at least a fair credit score of 620 or higher, although FHA and VA refinance loans are typically available with lower scores. Watch for errors on your credit record that could reduce your score and make mortgage qualifying harder.
- Debt-to-income ratio (DTI): Mortgage requirements dictate that you’ll need to keep your debt below a set percentage of your income (often 36% to 43%). If you owe too much money on your current debt and loans, you may have to pay down some debt before you can qualify for a mortgage.
- Loan-to-value ratio (LTV): Mortgage guidelines typically cap the amount you can borrow, relative to what your home is worth. If you are refinancing to take cash out of your home, you’ll need enough home equity to pay off your current loan and stay within the new loan's guidelines.
- Closing costs: Closing costs typically total 2% to 5% of your loan amount when you refinance. You'll either need to pay these costs up front or roll them into your loan, which can make them more expensive over time.
- Loan seasoning: Some lenders don't let you refinance unless you have had your current loan for a minimum period of time, such as six months.
- Down payment: You usually will not need to make another down payment to refinance, unless you don't have enough equity in your home and must bring money to the table to meet your loan's loan-to-value requirements.
5. Determine Your Savings Potential
In many cases, you don't want to refinance a home loan unless you can save money on your current loan. Consider whether you will save money not just on your monthly payment, but over time. If you extend your repayment term, you could lower your monthly payment but be in debt longer and pay more interest and finance charges over the life of the loan.
You can use a refinance calculator to see how much your refinance loan will cost and compare it to your current mortgage. Since there are closing costs to pay, it's also important to calculate your refinance break-even point. That's the point when your savings from refinancing cover the upfront costs you paid to refinance.
6. Submit a Mortgage Application and Documentation
Most conventional refinances will require you to complete a new mortgage application and provide full documentation to qualify. Streamline refinances often have less paperwork and an easier application process. If you are a current Freedom Mortgage customer, you may be able to start your streamline application by calling or going online.
You will need to be ready with the required mortgage application documentation, including:
- Identification
- Proof of income and employment
- Documents showing your assets and debts
- Your credit history
7. Review Documents and Attend Closing
Closing on a refinance mortgage loan is extremely similar to closing on a house. After your mortgage application goes through underwriting, you'll get official approval for a home loan. During the refinancing process you'll receive initial disclosures you’ll review to confirm details on estimated costs, interest rate and loan terms.
If you're ready to move forward, you'll get a closing date and final closing disclosures. You'll sign papers and pay any closing costs during the closing process. Then, your loan funds will be disbursed. Your old loan will be paid off and, if you took a cash-out refinance loan, you'll get the extra money deposited in your account.
Once the process is complete, you'll start paying monthly on your new loan.
Home Loan Refi Process FAQs
Still need to know more? Here are answers to some frequently asked questions about the home loan refi process.
How Much Does It Cost to Refinance a Mortgage?
Costs to refinance a mortgage can include fees for numerous items including appraisals, title insurance, credit checks, and other lender fees such as underwriting and origination fees. The total cost of refinancing a mortgage is usually 2% to 5% of the amount of your loan.
How Long Does It Take to Refinance a Mortgage?
The timeline for refinancing a mortgage can vary by lender, loan type, appraisal requirements, and how quickly you submit your documents. That said, it usually takes around 45 to 60 days to refinance.
What Disqualifies You From Home Loan Refinancing?
You may be ineligible for refinancing if your home has insufficient equity to satisfy the outstanding balance on your current loan and meet the loan-to-value (LTV) requirements of the new loan. Additionally, your refinancing application may be denied if your debt-to-income (DTI) ratio exceeds acceptable thresholds, you are unable to provide adequate documentation of stable and verifiable income, or your credit score falls below the minimum qualifying threshold required by the lender.
Final Thoughts: Are You Ready to Refinance?
Refinancing a home loan can be a great option if you can reduce your current rate and payments, or if you want to tap equity in your home with a cash-out refinance loan. You should understand the total refinance costs and weigh the pros and cons before moving forward, though.
A mortgage loan professional can help you understand your refinance options. Contact Freedom Mortgage today to get prequalified to see if a mortgage refinance will work for you.
*By refinancing, the total finance charges may be higher over the life of the loan.
This article is for informational purposes only, is not intended as investment or financial advice, and should not be construed as such.
This is not a commitment to lend. Freedom Mortgage Corporation is not, nor is it affiliated with, any governmental agency or organization. Loans are subject to eligibility, credit approval and property requirements.
Victoria Araj is the Senior Director, Managing Editor at Freedom Mortgage. In her 20 years of working for top mortgage lenders, she’s held roles in mortgage banking, public relations, editorial content, and more. She has a bachelor’s degree in Journalism with an emphasis in Political Science from Michigan State University, and a master’s degree in Public Administration from the University of Michigan. She has spoken at several industry conferences, where she’s discussed the importance of editorial content for brands.
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