How to Refinance Your Home

Why do you want to refinance?

Taking out a new mortgage is a big decision. Make sure you have a goal in mind before you begin the process.

Are you looking to cash in on your home's equity? Maybe your credit score or property value is higher, or interest rates are lower than when you bought your home. Or have you been paying mortgage insurance that you can get rid of by refinancing? In some scenarios, that could save you a few hundred dollars a month.

Knowing your financial goal can help you pick the best type of loan for you.

Types of refinance loans

Traditional

Traditional, or rate-and-term refinance loans, work for most refinancing needs. You'd get a rate-and-term refinance loan if you're looking to lower your monthly payment, interest rate or loan term. It's also a good option for switching from an adjustable-rate mortgage to a fixed-rate mortgage. If you're planning to shorten your loan term and increase your monthly payments, make sure the interest rate for the new, shorter loan term is better than your current one. If they're about the same, you might be better off just doubling down on your principal each month. While some mortgages have prepayment penalties, they don't usually apply when a consumer is writing bigger checks to pay off their loan at a faster pace. Prepayment penalties are illegal for some type of loans, such as mortgages backed by the Veterans Administration or the Federal Housing Administration, and always need to be disclosed before you sign.

No closing cost

Some lenders offer refinance options without closing costs. They don't actually mean there are no closing costs - the costs are just wrapped into the loan, meaning you'll pay them off over time, with interest. If you're planning to sell your home soon, this could be a good option. It could also benefit you if you're refinancing with an interest rate low enough to offset an increase in your loan amount, and you can't afford to pay more at closing.

Streamline

Government-backed FHA, USDA and VA loans have a faster, simpler refinance option called a streamline refinance loan. Streamline refinances take less time and paperwork and don't require an appraisal. To qualify, your payments must be up to date. You also can't borrow against your home equity.

Mortgage relief refinancing

If your home's current value is less than the amount you owe, Fannie Mae and Freddie Mac have some mortgage relief refinancing options to help homeowners avoid defaulting on their loans. Homeowners with low or negative equity on their homes can refinance with lower interest rates using Fannie Mae's High Loan-to-Value Refinance Option (HIRO) or Freddie Mac's Enhanced Relief Refinance (FMERR).

VA Streamline loans can offer similar benefits for veterans who are underwater on their mortgage.

Cash-in

In essence, a cash-in refinance allows you to make a down payment on your home after your original purchase date. This might be a good option if you want to get rid of mortgage insurance or if you want to pay down your loan balance in a lump sum rather than in extra principal payments.

Cash-out

A cash-out loan allows you to borrow against your home's equity. So instead of bringing cash to closing to pay down a lump sum, you can withdraw a portion of what you have already paid toward your home's principal. In a cash-out loan, either your loan term or your loan amount will increase. These loans are best if you intend to use the money you receive at closing for a project that will increase the home's value in proportion to the loan increase.

Cash-out refinances may be helpful if you know exactly how much you need to borrow. If you don't, consider looking into a Home Equity Line of Credit (HELOC). Using a HELOC, you can draw on your home's equity using special checks or a bank card. Some HELOCs have an initial interest-only period. Shop around to get the best terms. Typically, the lender will be a local bank.

Reverse mortgage

A reverse mortgage refinance loan is another option to get cash out of your home equity if you're over 62 years old. When you refinance with a reverse mortgage, your start receiving regular payments based on the value of the home. Think of it like slowly selling your property to the lender. When you die, the executor of your estate will sell your home and use it to pay off the remainder of the loan. If there's any money left over, it goes to your children or heirs.

If you're considering a reverse mortgage, exercise caution and make sure to avoid scams. Even if you've found a legitimate lender, be aware that a significant amount of your equity may get wrapped into interest and fees.

Do your research

Before you start shopping for lenders, check your own credit score and debt-to-income ratio to make sure you qualify for a refinance loan. Find out how much equity you actually have and check a few online refinance calculators to estimate your interest rate.

Establish a break-even point by calculating how much money you would need to save per month to offset closing costs. If you're unsure what kind of closing costs you'll need to pay, calculate the break-even point for tiers from 2% to 5% of your estimated total loan amount.

Shop for lenders

If you're not using an independent mortgage broker, shopping for lenders can be a bit work-intensive. Online rate comparison tools can start you in the right direction. You can also contact companies and ask for a rate quote.

Ask lenders about their requirements. Do they require an in-person appraisal? What kind of fees do they charge? What can you expect to pay in closing costs by financing with their company?

If you plan to own your home for a long time and you haven't found an interest rate as low as you had hoped, ask the lender about paying for discount points. Discount points are typically equal to about 1% of your loan, and each point can lower your interest rate by about 0.25%.

When you're talking to a loan advisor, you want to be as transparent as possible about your finances to get a realistic quote. Lenders will discover your financial situation when you apply and begin the closing process. Hiding information for a better quote will only waste your time.

Apply for loans

Narrow down your lender options to a few companies and apply to all of them on the same day. Submitting applications quickly can help minimize the ding on your credit score from soft inquiries.

Again, be as transparent as possible on your application to get an accurate quote and speed up the process.

Lock in a rate (or two)

While you're shopping for a lender, loan advisors from the companies you speak with may ask you if you want to "lock in" your interest rate. Basically, "locking in" rates guarantees that your lender can't raise or lower your interest rate while you're closing on your refinance loan unless the information you provided on your loan application changes.

Remember that interest rates change quickly and frequently during the week. If a lender is offering you a low fixed rate, it might be a good idea to lock it in, even if you're not yet certain about the lender.

You aren't likely to get a fully accurate loan estimate until you lock in your rate and the lender begins the closing process. In your final estimate, you may see the loan amount has changed, or fees that weren't previously discussed.

For this reason, you might want to consider locking in rates with multiple companies. Some lenders may charge fees to lock your interest rate, but many of the bigger ones will do it for free. If you go this route, be aware that once you lock in a rate, the lender will do a "hard credit inquiry." This kind of inquiry can lower your credit score by a few points.

Just like with applying for loans, it's best to lock in rates around the same time to minimize the impact on your credit score, and so that one inquiry doesn't show the effects of another.

Prepare for your appraisal (if you need one)

If your lender requires a property appraisal, you'll need to come up with a time to meet the appraiser at your home. Before the meeting, write down any home repairs, renovations or remodeling you've done since moving in that may have increased your property value. Be sure to include any increases to your home's square footage.

Examine your final loan estimate

Once you get your final loan estimate (or estimates, if you locked in with several companies) look closely at the information on page one. Verify your loan amount, interest rate, principal and interest, closing costs, and whether or not you need to bring cash to close. Ask your loan officer about any inconsistencies in your projected monthly payments.

On the second page, pay attention to your origination costs and other fees, especially the fees you can shop for. You might be able to save some money by shopping for your own title company.

On the last page, you should find a handy comparison chart that lists your projected payoff in five years, your annual percentage rate, and the total interest you will pay over your loan term. If you have more than one estimate in hand, compare these side by side. If loans with the same interest rates don't match up, take a look back at your loan amount and fees.

Close on the loan

Once you've found the best deal, it's time to close on your refinance loan. Your lender will contact you to meet with a notary. This may happen at the lending office, at a title company or in a home or coffee shop where you and the notary agree to meet. If you're providing a down payment or any other closing costs, bring that with you. You'll also need a few forms of identification. You'll sign the refinance paperwork in front of the notary, who will stamp it and provide you with a copy of the paperwork.

Make sure you keep your paperwork somewhere safe at home.

Your new loan should take over your old one within a week. Once it does, you might receive a couple checks back in the mail for leftover escrow from your old mortgage or any payments you made over the loan payoff amount.