Key Takeaways
- Refinancing replaces your current home loan with a brand new one tailored to your needs.
- Homeowners usually refinance for new loan terms or interest rates, access to home equity, or more predictable monthly payments.
- Most refinances involve applying for a new loan, reviewing and preparing documentation, underwriting, appraising, and closing.
- Common mortgage refinances include conventional, cash out, FHA streamline, and VA refinance loan options.
A mortgage refinance is the process of getting a new mortgage loan, with new terms, to repay your existing mortgage.
You might refinance to lower your interest rate, or to change the terms of your loan, such as moving from an adjustable rate to a fixed rate. You can also refinance to take cash out of your home’s equity [HC1.1]for things like repaying other debts or home improvement projects.
This article will explain what mortgage refinancing is, how the process works, the types of loans you can refinance, and the pros and cons of refinancing your home loan.
What Does It Mean to Refinance a Home Loan?
Refinancing a mortgage means applying for a new home loan—either with your current lender or a different one—usually for a lower interest rate, a different loan term, or to tap into your home equity. Once your application is approved, you'll close on the new loan and pay off your existing mortgage. You'll then begin paying on the new home loan under your new terms. Depending on the interest rate change, the new loan term, and how much money you took out, if any, your new payment may be higher or lower than your old one.
If you pursue a cash out refinance, any extra money you borrow will be yours to use for whatever you'd like, such as paying for home improvements or repaying other higher-interest debt. If you’re considering refinancing, check out our refinancing calculator to estimate your new monthly payment.
Mortgage Refinancing Types
There are different mortgage refinance types to consider based on your current loan type, amount of home equity, financial goals, and other eligibility factors. Here are three of the most common types.
| Conventional Refinances | Cash Out Refinances | Streamline Refinances |
|---|---|---|
|
|
|
There are other options, such as reverse mortgages or short refinance loans. However, these options are often less common and only available in unique circumstances.
How to Refinance a Home
Although the refinancing process can vary by lender or loan type, many homeowners follow a variation of these steps when refinancing a mortgage.
1. Determine Your Refinancing Goals
The first step toward refinancing should be determining your goals. Establish your primary motivation for refinancing and how it will contribute toward your long-term financial goals. If your home is currently financed via an adjustable-rate mortgage (ARM) loan, you may want to refinance to a fixed-rate program for more stable monthly payments; if you’re facing outstanding debts, high home improvement costs, or other expenses, you can refinance to access your home equity. Before moving forward, establish the right time to refinance based on these goals and future plans.
2. Review Your Credit and Finances
After clarifying your refinancing goals, review your FICO scores and overall financial situation to see if you qualify. Most lenders require at least a fair or good credit score to qualify for a mortgage; they’ll look at your score, debt-to-income ratio, and credit history, among other components, to determine your eligibility. Try running a credit check online to see where your score is. high credit scores and a strong financial profile can make it easier to qualify. You can also check your credit report for accuracy and dispute any errors you notice. If you want to raise your credit score before applying, paying down outstanding debts and making timely payments will work in your favor.
3. Choose Your Refinance Type
Next, you’ll choose a refinance option. Your lender can help you decide whether a conventional refinance loan, a cash-out refinance loan, or a streamlined refinance loan would fit your needs. You'll also want to think about your loan term. The two most common are a 30-year loan, which has a longer payoff time and higher interest costs over time but lower monthly payments; or a 15-year loan, which has a lower rate and much lower total interest costs but much higher monthly payments.
- Cash out refinance: These allow homeowners to refinance their mortgage for a new, larger loan and access the difference in cash using their home’s equity.
- FHA cash out refinance: Eligible FHA borrowers can refinance to tap into their home’s equity by refinancing for a new FHA loan.
- FHA streamline refinance: This is a simplified, expedited program that allows eligible FHA borrowers to refinance for a new FHA loan with less paperwork.
- VA IRRRL: Eligible VA borrowers can refinance to a lower interest rate with fewer qualifying requirements.
- VA cash out refinance: Qualified veterans and military borrowers can refinance their mortgage for a new loan while converting a portion of their home’s equity into cash.
Compare your options with your lender, who can help you choose the refinance type and loan terms that best support your financial situation.
4. Select Your Mortgage Lender
The next step in refinancing is finding a lender if you haven’t already. To find a trustworthy lender, compare options based on their loan options and qualification requirements to find the best fit for your financial needs. Ensure your lender has a good customer satisfaction rating, as many problems can happen with a poorly planned mortgage. At Freedom Mortgage, we offer a variety of refinancing options like the VA IRRRL and FHA cash out refinance, meaning there’s probably a loan program suited for your financial needs.
Are Today’s Rates Right for You?
We can help make refinancing and getting cash from your equity more affordable. Ask us what rate we can offer you.
Get Started
5. Apply for Your New Home Loan
Once you apply for a new home loan, gather the proper paperwork and financial documents. Your lender may request tax returns, pay stubs, mortgage statements, property tax bills, and homeowners’ insurance statements to validate your financial circumstances. Preparing these documents in advance can help expedite the process and shorten the wait time during underwriting.
From here, the lender will review your finances and eligibility to determine your loan options and interest rate based on your refi application. You’ll also be able to lock in your interest rate at this stage, which can protect you from market rate changes while your loan is being processed. While many homeowners refinance to get a lower rate, some borrowers may refinance to a slightly higher rate if it gives them more stability in their loan terms, such as moving from an adjustable-rate mortgage to a fixed-rate loan.
6. Complete Underwriting and Appraisal
Completing the underwriting and appraisal means your application is getting closer to approval. From here, your lender will review all of the information provided in your application to assess the risk and ensure you still qualify for the new loan. A home appraisal is a key part of this process that helps determine the current market value of your home and verify that the loan amount is consistent with your home equity. Keep in mind, lenders typically won't lend you more than 80% - 90% of your home's value. Prepare your home for an appraisal by decluttering and fixing minor repairs.
7. Close on Your New Home Loan
Finally, the refinancing process ends with the closing of your refinance loan. At closing, you’ll sign your new loan documents, pay any closing costs and fees, and officially trade out your old mortgage for the new loan. Refinance-specific closing costs include title services, credit report charges, and lender fees. When they can, many homeowners choose to roll these costs into the new loan balance. When the refinance is completed, your original loan will be paid off, and you will start making payments under the new loan.
How Much Does It Cost to Refinance a Mortgage?
The cost to refinance your home can be anywhere from 2%--6% of the value of the loan; however, these numbers can vary by factors like your lender or loan terms. Much of these costs will be paid at closing. Here are some of the fees you may see lumped into your closing costs.
- Application fees
- Loan origination fees
- Appraisal fees
- Credit report fees
- Title search and insurance fees
- Underwriting fees
- Discount points
Is It a Good Idea to Refinance a Mortgage?
Refinancing your mortgage can make a lot of sense under the right circumstances, but whether you should refinance or not depends on your situation. Here are some common benefits of refinancing.
- Use your home equity: If you’d like to access the equity in your home to use the money for things like paying down higher interest debt or improving your house, refinancing can give you access to these funds at low interest rates compared to personal loans or home equity loans.
- Lower your interest rate: You can get a better interest rate to save on borrowing costs. If you can reduce your rate, then more of each monthly payment can go towards reducing your balance (or for whatever you want each month). You can save on interest not only each month but during the life of the loan.
- Change your loan type: If you have an adjustable-rate mortgage (ARM), refinancing into a fixed-rate loan will provide you with more certainty in payment costs through the life of your loan. This is especially important if your ARM will soon start adjusting.
- Adjust your loan terms: Refinancing into a longer loan term can lower your monthly payment, though you’ll pay more interest over time and total finance charges may be higher over the life of the loan. For many homeowners, refinancing can still make sense if it helps lower debts, secure a better rate, or create more financial stability with an adjusted loan term.
Explore our refinance options at Freedom Mortgage to see how refinancing your current mortgage could help you save money and reach your financial goals.
Other Refinance Considerations
Refinancing may not be a good plan for you under the following circumstances.
- Current interest rate: You have a very low interest rate on your current loan, and you don't want to lose it. Rates during the pandemic era hit record lows, so cash out refinancing now could mean you get stuck with a higher rate. A home equity loan might make more financial sense in this scenario.
- Debt repayment timelines: You want to be debt-free as soon as possible. Refinancing usually extends your payment time. If you have a 30-year mortgage you've been paying for five years, and you refinance to a new 30-year loan, you've just added five years to your mortgage debt-free date.
- Costs to refinance: You don't want to pay the costs of refinancing. Closing costs can be several thousand dollars or more, and you either need to pay these costs or roll them into your loan (which means you'll be paying interest on them and paying them off over many years).
- New payment affordability: You aren't confident you can make the new payments. If you are considering a cash out refinance loan but aren't sure you'll be able to comfortably make the payments after you increase your loan amount, you could put your house at risk of foreclosure.
You should always carefully consider the pros and cons of refinancing to decide if it is right for you.
Mortgage Refinancing FAQs
If you still have more questions about refinancing, here are the answers to some frequently asked questions.
How Much Equity Do You Need to Refinance?
The amount of equity you need to refinance depends on your lender's policies, your current mortgage balance, and the amount you want to borrow. Most lenders don't approve new loan amounts higher than 80% or 90% of your home's value. So, if you have a $100K home, you'd likely need at least $20K in home equity to refinance with a loan no greater than $80K.
How Quickly Can I Refinance After Closing?
The rules for refinancing after closing vary by lender. You may be able to refinance shortly after you close on your loan, but some types of loans require a six-month waiting period. Use caution when refinancing too often, as it could reduce your overall savings.
How Long Does It Take to Refinance a Mortgage?
Refinancing, on average, takes 30-45 days for most applications; this can vary based on your lender, the type of refinance, and its complexity.
Does a Second Mortgage Count as a Refinance?
A second mortgage is different from a refinance because it involves taking out a new loan that’s secured by your home. This new loan is in addition to your existing loan, and your current mortgage is usually not affected. By contrast, refinancing involves getting a new loan to replace the original loan you currently have.
Final Thoughts: Should You Refinance Your Home Loan?
Refinancing a mortgage can be a great choice in the right circumstances, but you need the right lender to make it happen.
Freedom Mortgage has helped many clients successfully refinance their homes using a conventional refinance loan, cash out refinance loan, or FHA streamline refinance loan.
Give us a call today to learn how we can help you explore whether refinancing your mortgage will fit your financial goals and how much money you can save.
If you’re ready to move forward with refinancing, get prequalified online with Freedom Mortgage today.
*By refinancing, the total finance charges may be higher over the life of the loan.
Angelica Victor is a writer and current senior at Hampton University, where she is pursuing a B.A. in English with a concentration in creative writing. Angelica has completed four internships across three different companies, where she’s held writing, communication, and marketing positions, garnering experience in writing client-facing publications and internal communications. She specializes in homebuying, real estate, and finance-related topics. Angelica always strives to communicate complex, nuanced topics clearly and effectively.
When she’s not working, Angelica serves as the president and senior editor of Hampton University’s campus literary magazine, where she leads editorial directions and oversees annual publications. Additionally, she’s the vice president of the Alpha Beta Zeta chapter of the National English Honor Society, where her leadership informs an attention to language, which she carries beyond academic settings. Angelica focuses on creating content that helps readers understand their options and make informed financial decisions.
You Might Be Interested In
When to Refinance Your Mortgage
Learn When It Makes Sense to Refinance—and When It May Not
How To Refinance a Mortgage
7 Steps to Refinance Your Home Loan
A Guide to Mortgage Refinance Requirements
Get a Better Idea of Your Refi Eligibility
- ${title}${badge}