Homeowners have many reasons for refinancing their mortgage. Among them, their financial situation has changed, they seek to lower their interest rate, or they want to use their equity. In all cases, this move can impact their budget for the next decade or longer, potentially resulting in thousands of dollars saved.
The refinancing process is like a mortgage application but includes a few additional steps. Learn about the benefits of refinancing and the best way to get started.
What Is Mortgage Refinancing?
During refinancing, a new loan replaces your current mortgage, with updates made to one or more of the following:
- Loan Type: Homeowners may refinance into a different type of mortgage, such as moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
- Interest Rate: Refinancing is often considered during a favorable market, as the homeowner may be able to secure a lower interest rate for the remainder of the loan.
- Loan Term: If your income has increased, you may decide to switch from a 30-year to a 15-year term, paying down the remaining balance in less time.
Refinancing also allows homeowners to tap into the equity they’ve built. With a cash-out refinance, a homeowner takes out a new mortgage for more than the amount owed on the existing loan, with the difference provided as cash. This can be used for home improvements, debt consolidation, education or another significant expense.
It’s important to note that refinancing can come with upfront costs, including closing costs and, when required, an appraisal.
What Can I Expect When I Refinance My Mortgage?
You’ll need to determine if you’re a good candidate before you gather documents for your application. Here’s what to consider.
What’s Your Goal for Refinancing?
Ask yourself why you want to refinance your mortgage and if you can reasonably achieve your goal. Some considerations include:
- Saving Money: If you’re approved, refinancing can help lower your interest rate, potentially eliminate private mortgage insurance depending on your loan and equity, or shorten the time it takes to pay off your remaining balance.
- Greater Stability: Refinancing when you’re more financially stable can help tame a rising monthly payment or cut additional costs.
- Making Financial Changes: Using your home’s equity can help you make necessary upgrades or pay off credit card debt in one lump sum.
What Does the New Loan Mean for Your Finances?
A lower monthly payment can be appealing, but it’s important to consider the full long-term financial picture before making a commitment, including:
- The upfront costs of refinancing, which may total two to six percent of the loan amount
- Savings over the term of the new loan
- How long you’ll make payments
- How much equity you’ll build
- If a higher monthly payment is doable
- Other debt repayment opportunities
- Refinancing versus a home improvement loan
How Do You Know If You Qualify to Refinance?
Lenders consider several factors when reviewing a refinance application, including the equity you’ve built in your property:
- Calculating Equity: Equity is the current value of your home minus the outstanding balance on your mortgage. Many lenders prefer homeowners to have at least 20% equity, although requirements vary by loan type and lender.
- Loan-to-Value (LTV) Ratio: Homeowners with a lower LTV ratio (your current balance compared to your home’s current value) may be viewed as lower risk and have access to more favorable rates or refinancing options.
- How Much Your Home Is Worth:Your lender may request an appraisal or use another approved valuation method to determine your property’s current value and calculate your LTV. Fannie Mae, for example, permits appraisal alternatives for certain eligible refinance transactions.
- Determine Your Savings: Factor closing costs into your projected savings to understand the potential financial benefit of refinancing.
How Should You Prepare Your Mortgage Refinance Application?
Lenders put together your financial history based on income, debts, assets and credit score. They’ll request:
- Your last two pay stubs
- W-2s or 1099s from the last two years
- Two recent bank statements
- Profit-and-loss statements, if you own a business
During their review, the lender will verify the information you have presented to determine your ability to make payments. They’ll then use these insights to approve your application and underwrite a new loan.
Credit score requirements vary by lender and loan program, though stronger credit can improve your chances of qualifying for more favorable terms.
Should You Lock Your Mortgage Interest Rate?
Depending on the lender and loan, you may have the option to lock your interest rate or allow it to float:
- Using a Rate Lock: Rate locks commonly last for a set period determined by the lender. If the deadline passes, you can either extend the lock for a fee or choose the market rate.
- Floating the Rate: Without a rate lock, the market rate is used to underwrite the new loan. This more variable choice could help you secure a lower rate if market rates decline before closing.
What Happens During a Home Appraisal?
If an appraisal is required, an appraiser will assess your property to establish its current market value. For accurate results:
- Make your home look its best for the appraiser.
- Assemble a list of all improvements made since you moved in, including repairs and additions.
- Research properties in your area to estimate the appraiser’s valuation.
What Happens at Closing When You Refinance?
Once underwriting and any required property valuation are complete, the lender finalizes the refinance terms. At this stage:
- The Closing Disclosure outlines the final terms and costs of the new loan, and is generally provided at least three business days before closing.
- Review the disclosure before signing your final loan documents and paying applicable closing costs.
- For cash-out refinancing, eligible proceeds are provided after closing according to the lender’s process.
- For many refinances of a primary residence, you may have a three-business-day right of rescission.
Frequently Asked Questions About Mortgage Refinancing
How much equity do you need to refinance a mortgage?
Requirements vary by lender and loan program, though having more equity can improve your options and potentially help you qualify for better terms.
Does refinancing always lower your monthly payment?
No. A lower rate may reduce your payment, but shortening the loan term, taking cash out or adding closing costs can increase it.
How long does a mortgage refinance take?
Timelines vary by lender, documentation, appraisal and underwriting, but the process can take several weeks.
When does refinancing make sense?
Refinancing may be worth considering when it can reduce borrowing costs, improve loan stability, shorten the repayment term, or help you access equity for a specific financial goal.
Is It Time to Refinance Your Mortgage?
NVE Bank, A Division of Ion Bank, can help you explore refinancing options. Explore our lending products, current mortgage rates and how much you could save by speaking with a member of our team today.