Home loan refinancing: Steps, when to do it, and cost

What does mortgage refinancing mean?

Most people start out by locking into a mortgage for 15–30 years. It’s a tried-and-true way to purchase a home and build long-term wealth. But changing circumstances and financial needs can make your original loan less than ideal. Lower interest rates may become available, perhaps you need cash to cover a major expense, or maybe you simply want to pay off your mortgage sooner. That’s where mortgage refinancing comes in. Refinancing is a strategy that allows you to swap your existing mortgage for a new one that better meets your needs.

Types of mortgage refinancing

Mortgage refinancing can take many forms. Here’s a look at some of the most common types:

Rate and term: Change the interest rate and certain terms like going from an adjustable rate to a fixed rate.

Cash-out: Access the equity in your home to get cash for consolidating higher-interest debts, pay for major expenses, or fund a home remodeling project to name a few. Keep in mind, this method will increase your overall mortgage obligation.

Cash-in: You can pay a lump sum towards the mortgage to lower the amount of your debt and potentially lower monthly payments and even your interest rate.

No-closing-cost mortgage: Instead of paying closing costs upfront, you can roll them into the principal of the new loan. It’s important to note that your interest rate and monthly payments are likely to increase.

Short refinance: This method involves an agreement with the lender to forgive a portion of the mortgage to lower your overall debt. This option is often used to prevent foreclosures.

Reverse mortgage: Designed with older individuals in mind, a reverse mortgage allows owners to withdraw the equity they’ve accumulated and receive monthly payments (often for life), and in return, the lender takes ownership of the property at the end of the contract.

Streamline refinancing: Loan requirements such as the credit check or appraisal can be waived on certain types of loans like FHA or VA mortgages.

How does refinancing a mortgage work?

Refinancing a mortgage is like a reset. It allows you to change the terms of your loan to create more favorable repayment conditions so you can focus on other financial goals.

What happens when you refinance your home?

When you refinance your home, the previous mortgage is paid and closed out. A new one is created through a process that’s similar to the one you went through with your original mortgage. You can renegotiate terms with your current lender or refinance with a different lender altogether. Either way, the old mortgage is ended.

What happens to your home equity when you refinance?

If you’re refinancing to get better terms like a lower interest rate, for example, your equity might remain the same. With cash-out refinancing, you can look at it as trading all or a portion of your home equity for a lump sum payment. You will then start to rebuild your equity through the new mortgage payments.

Mortgage refinancing pros and cons

Mortgage refinancing can bring many benefits, but it’s important to realize that there are costs and conditions that go along with it. Here are some of the most common pros and cons:

Pros of refinancing

• Provide more favorable terms like lower interest rates.
• Remove the unpredictability of an adjustable-rate mortgage for the consistency of a fixed-rate mortgage.
• Access cash to start a business, make major purchases, or pay off higher-rate debts.
• Allow faster loan repayment.
• Eliminate the need to carry private insurance to secure the mortgage.
• Ease the strain on your monthly budget with lower payments.

Cons of refinancing

• Closing costs can amount to thousands of dollars.
• Terms that lower your interest rate often mean that the mortgage duration will be lengthened and the overall cost of your loan will be higher.
• You may lower the amount of equity you have in your home.
• Your credit score will be temporarily affected due to credit checks as part of the loan qualification process.

How to refinance a mortgage: 8 steps

Once you’ve decided that refinancing your mortgage is the right move, how do you make it happen? The process is similar to securing a first mortgage and includes these steps:

1.      Be clear about why you’re refinancing: Having a specific goal in mind will help you evaluate the various refinancing options and current market conditions to secure the best terms.

2.      Choose a refinance option: Determine which refinancing method best aligns with your goals.

3.      Shop around for lenders: Find the lender with qualification requirements, fees, interest rates, and repayment terms that are most favorable to your circumstances.

4.      Gather documents: Just like with a first mortgage, you’ll have to demonstrate your ability to repay the loan by providing documents like pay stubs, bank statements, federal tax returns, and proof of net worth.

5.      Lock in your rate: Some lenders allow you to lock in your interest rate before you finalize the loan. This means you won’t be affected if interest rates go up, but you also won’t be able to benefit if rates go down.

6.      Underwriting: Once you’ve submitted all your paperwork, the lender will go through the process of verifying the information you’ve provided and appraising the home’s value.

7.      Appraisal: An appraiser will visit your home and evaluate it against certain criteria. Let the appraiser know of any major repairs or upgrades you’ve made since purchasing the house, like roof replacements, room additions, or kitchen remodeling.

8.      Close: At the closing, you’ll sign the paperwork and pay closing costs to make the new mortgage official.

How much does it cost to refinance a mortgage?

Refinancing your home loan will cost anywhere from 2%–6% of your loan’s total value. It’s important to consider these costs when deciding whether to refinance. Do you have enough cash to cover these costs? While some loans allow you to roll closing costs into the loan, that usually means you’ll have a higher interest rate, which could counteract the benefits of refinancing. A common rule of thumb states that you want to lower your interest rate by at least 2% when refinancing.

Typical refinance home rates

Home refinance rates tend to fluctuate based on several factors. The stock market, inflation, decisions made by the Federal Reserve, and the current housing market are typical economic factors that influence refinance interest rates. Your credit score, debt-to-income ratio, and the size of your loan also play important roles in determining your interest rate.

When to refinance your mortgage

Whatever the purpose for your refinance, the best time to refinance is generally when interest rates go down. This strategy allows you to save money on the total cost of your loan and may also free up some cash in your monthly budget. You’ll also want to consider your current financial condition and how refinancing will affect your debt-to-income ratio when deciding whether to refinance.

How soon can you refinance a mortgage?

Some lenders will allow a refinance almost immediately after you take a mortgage while others require what’s commonly referred to as a seasoning period. For example, your original lender may require a six-month period before refinancing with them. However, that doesn’t prevent you from looking for other lenders to refinance your loan.

How often can you refinance your home?

There’s no hard-and-fast rule for how many times you can refinance your home. You can pretty much refinance as often as you like. However, refinancing costs can add up and eat away at any financial advantages you would have gained.

How long should you wait to refinance your home?

Make sure you have given yourself enough time to recover from the financial outlay of securing the previous mortgage. Each refinance comes with its own closing costs.

Bottom line: Should I refinance my mortgage?

Refinancing your mortgage can be a smart financial strategy. When deciding whether or not to refinance, here are a few things to consider:

• Does refinancing help with achieving your financial goals?
• Are the new terms of the loan worth the time, effort, and additional costs?
• Do you plan to live in the house long enough to recoup the costs of refinancing?
• Can you recover the costs in a reasonable amount of time through your regular savings habits?

Because everyone’s current situation and future goals are different, it’s best to seek the advice of a financial professional.

Protecting your mortgage with life insurance

Your home is more than an investment, it’s a place where you and your family can build memories and feel secure. Protecting your mortgage with life insurance is a simple step to help ensure that your loved ones can remain in the place you’ve worked hard to build no matter what happens.

Home loan refinancing FAQs 

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