How to refinance your mortgage

Considering a refinance? Here are five steps you’ll need to take to make it happen. (iStock)

If you're a homeowner and you're wondering how to refinance your mortgage, now is the right time to research loan options. Since interest rates are low, you could get an excellent deal. Refinancing your mortgage takes some time and money, so make sure you do your due diligence on types of mortgage refinance deals available, including the cost of refinancing, before submitting any applications (your savings account will appreciate it).

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Here are the steps you can expect to take when you refinance your mortgage:

  • Step 1: Determine the value of your property
  • Step 2: Compare refinance rates from multiple lenders
  • Step 3: Decide if a refinance is a good option for you
  • Step 4: Collect required documents
  • Step 5: Review your loan estimate

Step 1: Determine the value of your property

Here's what you need to do before you apply for a mortgage refinance.

  • Make sure you have equity in your home: Equity is the amount of money you'd have after what you owe on your mortgage if you were to sell the property right away. Some mortgage lenders won't consider a refinance unless you have at least 20% equity in your home. Here's everything you need to know home equity and refinancing.
  • Check your loan-to-value ratio: When considering an application for a mortgage refinance, mortgage lenders look at a property's loan-to-value ratio (LTV), or how much the borrower owes compared to how much the property is worth. Most lenders want an LTV below 80% because it's considered a lower risk for them. To determine your LTV, divide the amount you owe on your home by the value of the property. For example: If you owe $300,000 on your home and your property is valued at $400,000, the LTV is 0.75 (or 75%).

If you've already taken these steps, then you can get a jump-start on comparing mortgage refinance lenders and deals now through Credible.

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Step 2: Compare refinance rates from multiple lenders

A home refinance isn't free. Since you're replacing your old mortgage loan with a new loan, you'll be responsible for many of the same fees you paid during your initial closing, including an application fee, loan origination fees, an appraisal fee, and closing costs.

Loan rates vary depending on the lender. If you're going to spend several thousand dollars refinancing your mortgage, take the time to shop around on a platform like Credible to compare loan rates without affecting your credit score. Credible allows users to compare prequalified refinance rates from top mortgage lenders. Unlike other sites, Credible provides accurate lender information and transparency regarding lender fees and additional loan costs.

Plug your information directly into Credible's free online tool now to compare rates and view your loan options.

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Step 3: Decide if a refinance is a good option for you

Once you've looked at the value of your property and considered rates from multiple refinance lenders, it's time to examine the reasons to refinance and if it makes sense for you.

When a refinance may be a good option

Some situations that could indicate when you should refinance your mortgage include:

  • You plan on staying in the home for at least five more years.
  • You can score at least a full percentage rate lower than your current interest rate.
  • You can lower your monthly payment or save on total interest paid over the life of the loan.
  • You have a clean credit report and can qualify for lower rates.

Living in a home longer allows you to maximize the benefits of your lower interest rate, and your overall savings by reducing your mortgage interest rate by at least 1%.

When refinancing might not make sense

Some situations that could indicate when you should not refinance your mortgage include:

  • You plan to leave your home in less than five years.
  • You have bad credit and spotty credit history.
  • You can't afford the closing costs and other fees.

You need to make sure you're not spending more money than you'd save. This could be the case if you leave a property before recouping the loan costs in savings.

Credible can also help you determine if now is the right time to refinance your mortgage.

If you're considering a mortgage refinance or evaluating loan options, you'll need an online mortgage refinance calculator. Consider the cost of your refinance, the amount you'll save per month, and how long it will take you to recoup the money you put into your refinance. Using a mortgage refinance calculator should tell you if you're saving money by refinancing.

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Step 4: Collect required documents

When you decide to move forward with your refinance, you’ll need to collect all your required forms. Make sure to keep them handy in case your lender needs additional copies. Paperwork you should keep on hand include:

  • Proof of income and employment
  • Tax returns for the past two years
  • List of any assets
  • Copy of your current loan
  • Debt statements
  • Appraisal information

Your lender may require additional documentation. Send all documentation together to speed up the approval process.

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Step 5: Review your loan estimate

When your lender approves your application, they'll send a loan estimate and closing disclosure. The documents will outline your loan terms, repayment terms, and fees. Review the information to make sure the paperwork matches.

These documents are short and straightforward. Look out for your projected monthly payment, closing costs, fees, and whether your new loan includes a prepayment penalty.

Review your closing disclosure carefully. This document details all the final numbers in your loan. If you see an error or you have questions about a fee, charge, or another aspect of the loan, now is the time to address the issue. Once you sign the document, the lender issues your refinance, and you're on your way to saving money.

How much it costs to refinance

When you refinance your home loan, your current loan is replaced with a new loan. That new loan could include closing costs and other fees.

Common refinance fees include:

  • Application fee
  • Origination fee
  • Inspection fee
  • Home appraisal fee

The loan origination fee may be up to 1.5% of your total loan. ($5,250 on a $350,000 loan). You'll want to factor in about $400 for an appraisal and $500 for a home inspection. Your lender may also charge a title search and insurance fee, which could cost up to $900.

How to get the best mortgage refinancing rate

Several things affect your mortgage refinancing rate. Some things you can do to get lower rates include:

  • Have a credit score of at least 700
  • Reduce the balance on your credit cards or other loans
  • Consider refinancing into a shorter-term loan
  • Apply for a refinance if you have an LTV below 80%
  • Compare rates from multiple lenders to find

Benefits of refinancing your mortgage

While refinancing a mortgage comes with extra costs, there are many benefits to taking the time to apply with your lender. Some key benefits include:

  • Lowering your monthly payment
  • Reducing your interest rate
  • Ability to pay your home off faster
  • Ability to remove your private mortgage insurance
  • Access to funds from the equity in your home

If you think it's time to refinance your mortgage, run the numbers and compare rates from multiple mortgage lenders via Credible. Having all the information, including lender fees and other costs, will help you decide whether a refinance will help you meet your financial goals.

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