How much money could you save with a refinance? Will the savings justify the new loan’s upfront closing costs? Will it be worth the work required to get a new loan?
The answers to these questions aren’t always clear because mortgage costs and mortgage savings happen on different schedules.
This seven-step refinance process helps borrowers remove the mystery and stay on track.
- Refinancing uses funds from a new mortgage to pay off the existing mortgage. The homeowner then starts making payments on the new loan.
- Pre-approvals and Loan Estimates help compare rates and fees on new loans.
The Refinance Process Timeline
Here’s how to take a mortgage refinance from idea to reality:
1. Determine Your Goals and Make Calculations
Why do you want to refinance? The answer to this question will direct a lot of your decisions about the new loan — or whether to refinance at all.
Common refinancing goals include:
- Lowering the loan’s monthly payment by locking in a lower mortgage rate or extending the loan’s term
- Saving money on long-term interest. Sometimes, this requires making higher monthly payments
- Taking out cash from equity. The cash can pay off other debts, finance higher education, fund the down payment for a vacation home, or help achieve other goals
- Removing a co-borrower to gain more financial independence
- Changing the loan type: replacing an adjustable-rate mortgage with a fixed-rate mortgage, for example, or refinancing an FHA loan with a conventional loan to eliminate mortgage insurance premiums
Use a refinance calculator like this one to compare your new loan’s costs to your current loan’s costs and understand the full financial impact of refinancing.
Paying more later in exchange for lower payments now isn’t always bad. It might still be a great idea, especially if the immediate savings from the new loan help achieve another goal, like paying off high-interest credit cards — or if the lower payments allow the borrower to avoid foreclosure and keep the house.
Even then, it’s still important to compare loan offers and search for the best deal.
2. Ensure You’re Eligible
Will you get approved for the new refinance? Only a lender’s underwriting department can say for certain, but you can preview your own finances before applying for new loans. What you learn by analyzing your own eligibility can help you decide which kind of refinance to get.
Here’s what lenders look for:
- Credit score: FHA guidelines allow refinances with FICO scores as low as 580, though most lenders, including Refi.com, require 620 or higher. Conventional refinance lenders typically require 620 or higher.
- Debt-to-income ratio (DTI): This ratio compares your monthly debt payments, including the new mortgage payment, to your gross monthly income. If you spend more than 43 percent of your gross monthly income on debt, it’ll be hard to get approved for a conventional refinance, but FHA lenders might allow DTIs as high as 50 percent.
- Loan-to-value ratio (LTV): LTV compares how much you currently owe on your mortgage to the value of your home. Owing $200,000 on a $400,000 home, for example, creates an LTV of 50 percent. Most refinancing lenders won’t approve a loan higher than 80 to 85 percent LTV.
Looking at your own financial life the way a lender will see it can save time, money, and frustration. This step helps avoid loans you can’t qualify for.
3. Compare Rates and Terms
To get a cost estimate, you need to apply first. It’s okay to apply with three or four lenders, or even more.
You can apply with as many lenders as you want within a 14-day period and it will only count as one inquiry on your credit report.
Compare costs from different lenders by getting a Loan Estimate, or LE.
You’ll receive a Loan Estimate from each lender you apply with. Loan Estimates use the same format, even when they come from different lenders. This allows for quick side-by-side comparisons.
Naturally, lower interest rates save money in the future, but upfront fees have a big impact, too. Check the Loan Estimate’s fee sheet to compare loan origination fees and fees for application, processing, and underwriting. These can vary significantly by lender.
Pay special attention to the discount points. If the lender is showing you a rate that is bought down, that cost will show up on the fee sheet.
Fees for the appraisal, title work, escrow analysis, and credit report tend to be similar for all lenders.
Ideally, the loan’s savings will outweigh its costs, but since savings play out slowly and fees are due up front, it will take time for the loan’s savings to outweigh its costs.
How much time? This breakeven calculator can help you learn how long you’d need to keep the new loan to justify its costs.
Seeing more loan offers increases the chances of finding the loan that saves the most money. A refinance is a brand-new loan, so it can come from any lender, not just your current mortgage lender. Even if you’re thinking about keeping your current lender, it’s best to see how your lender competes with other offers.
There’s more to loan shopping than choosing the cheapest offer. It’s important to consider working with a loan originator who has great experience. One lender might have a good deal, but if they can’t figure out how to solve an issue to get the loan closed, or if they make a mistake, then that deal has no value.
4. Submit Documentation
To move forward with the refinance, you’ll need to upload documents like pay stubs or bank account statements. Some lenders may be able to tap into your employment history and financial accounts directly, with your permission.
Homeowners with government-backed loans who choose a Streamline Refinance can usually skip some of these steps. Most refinances are easier than the initial purchase mortgage.
With a refinance, the lender may want to check property tax receipts or ask for proof of homeowners insurance. If you’re self-employed or documenting income from a side hustle, the lender may ask for recent income tax returns.
Providing all information as soon as possible will help keep your loan on track. Check out our guide to the documents you’ll need to refinance to learn more.
5. Give Permission to Order an Appraisal
After you’ve applied for the new refinance, the lender will order an appraisal to check your home’s value, with your permission. You may have to pay for the appraisal upfront.
Some refinances, like the FHA Streamline, do not require an appraisal. You’ll be able to skip this step.
For non-streamline loan types, the appraisal helps set the maximum loan size for your home.
This matters most with cash-out refinancing which allows homeowners to pay off their current mortgage and take out cash from equity simultaneously.
For example, if a home appraises for $400,000, a cash-out lender may cap the refinance loan at 80% of that, or $320,000. If your current loan is $300,000, you have access to $20,000, less closing costs.
The appraisal can make or break a refinance, but there’s not much you, as the borrower, can do but wait.
6. Wait for Underwriting
All the pieces of your refinance puzzle — your debt, income, credit history, appraisal, current mortgage balance — come together during the underwriting process.
The underwriter will review the loan file and ensure it meets the guidelines for whatever loan type you applied for.
Like the appraisal, underwriting is a waiting game for borrowers. Your job: Respond quickly to questions and requests from the lender.
At this point, your new loan’s interest rate should be locked in, but the rate lock won’t last indefinitely. Underwriting delays that keep your application open beyond the rate lock period could jeopardize the locked-in rate. The new rate could be higher.
7. Close on Your New Mortgage
Closing makes the loan official. You’ll sign documents, accepting the new loan’s lien on your property and making sure property taxes and homeowners insurance premiums are on schedule to be paid by the new lender’s escrow account.
Money changes hands during the closing process. The new loan pays off the old loan. If you’re getting cash back from equity, you’ll receive a check made out to you.
You should also learn when the first payment on the new loan will be due.
After closing, you have completed the refinance process and have a brand new mortgage.
What Is a Closing Disclosure?
Federal law requires mortgage lenders to share all costs and fees with the borrower prior to closing day. You should receive this information through the Closing Disclosure, a 5-page document, at least three business days before closing day.
Be sure to compare the Closing Disclosure to the Loan Estimate you received earlier in the application process. If you notice changes that you don’t understand, ask your loan officer.
How Long Does the Process Take?
Refinancing your home is a big step. It won’t be completed in a matter of days. Most lenders estimate 30 to 45 days of waiting between applying and closing on the loan.
One reason for the wait time: The appraisal. The lender has to schedule a third-party appraiser to check out your home in person. Then the appraiser has to research home sales in your area to assign an official value to your home. This takes a while.
Also, the lender and closing agent have to gather documents from the other service providers, such as the credit reporting bureau, the title company, and local governments.
A Streamline Refinance can usually skip the appraisal and the credit analysis, allowing the loan to close faster. FHA, VA, and USDA loan programs offer Streamline Refinances. However, you can only use the program if you currently have one of those loans.
Start Your Refinance Journey With Refi.com
Refinancing is a chance to improve an existing mortgage. Some homeowners can lower their mortgage rates, saving thousands of dollars a year. Others need a new loan to eliminate expensive mortgage insurance premiums. Homeowners with adjustable-rate mortgages can refinance to avoid costly rate increases.
Whatever your refinancing goals, Refi.com specializes in helping homeowners like you secure better terms on their mortgages. Our experienced loan officers will guide you through every step of the process, from comparing rates to closing on your new loan.
Ready to explore your refinancing options? Start your application with Refi.com today and discover how much you could save.
