Record-low mortgage rates have many homeowners looking to refinance. If you’re planning to join their ranks, make sure you understand the process.
- Gather information.
- Field follow-up questions from the lender.
- Order a home appraisal, if needed.
- Schedule closing.
- Sign documents at closing.
- Get set up with your new lender.
When Should You Refinance Your Mortgage?
Before you begin – and backing up a step – your first question shouldn’t be how but whether to refinance. Consider how much you could save before you decide to refinance your mortgage.
If any of the following is true, then at least running the numbers is worthwhile:
- Interest rates have dropped lower than what you are now paying on your home loan. Typically, borrowers should look for rates that are at least three-quarters of a percentage point lower. But that’s not a hard-and-fast rule, says Craig Garcia, president of Capital Partners Mortgage. “With a bigger loan, even a smaller difference in rate might be worth it for somebody,” he says.
- Refinancing can help you reach your financial goals. It could help lower your monthly payment, allow you to take out cash, shorten your loan term, or combine your first and second mortgages.
- You plan on being in the house long enough to recoup the closing costs.
- You’re confident you’ll be eligible. Not all homeowners will qualify for refinancing at the lowest rates that make getting a new loan worthwhile. Know what shape your credit is in before you decide to refinance.
What Are the Steps to Refinance Your Mortgage?
If you’ve determined that refinancing makes sense, here’s what you can expect.
Step 1: Gather information. Lenders will need details about your original mortgage, most of which can be found on your mortgage statement.
“It can tell what your principal and interest payment is, the balance on your current loan, and the interest rate, so the lender knows what the full picture looks like,” says Alisa DeFalco, loan officer with the DeFalco Romack team at Motto Mortgage Elite in Washington.
Step 2: Prequalify. Prequalification allows you to find out the loan amount, interest rate and other terms to expect if you apply. The process uses a soft credit inquiry that won’t harm your credit score.
The lender should be able to break down your new cost per month, estimate your closing costs and figure out how long it will take to recoup your investment, Garcia says. You can ask lenders to run different scenarios, changing the terms for cash out or a longer repayment period.
Always shop around to see which lenders offer the lowest mortgage rates. DeFalco says a mortgage broker also can do that research for you across multiple banks.
Step 3: Apply. Once you decide which mortgage refinance loan is best for you, it’s time to apply. “The typical loan customer needs to provide details about their living situation and work history for the past two years,” Garcia says.
Get your paperwork in order. You’ll need to provide documentation to back up what you’re reporting.
The new lender will make you justify that you can continue making a payment on your original loan, even if you’ve never skipped one, Garcia says. Several federal streamline refinance programs, such as VA Streamline, don’t require this.
Otherwise, borrowers should expect to provide documentation, including their:
- Last two years of W-2 statements (If you’re self-employed, you’ll usually need to show two years of tax returns.)
- Most recent pay stubs
- Proof of home insurance
- Driver’s license or another form of ID
You may also be asked to show information about your bank accounts as well as properties and other assets. Once you’ve applied, you can pay a fee to lock in your rate within 30 to 60 days of receiving the quote.
Step 4: Field follow-up questions from the lender. The lender may come back and ask for additional information. For instance, you may have to explain a drop in income or gap in employment.
“When we do ask for something, the quicker you respond to the item that is requested, the smoother and quicker the transaction goes,” DeFalco says.
Step 5: Order a home appraisal, if needed. If you are not pulling cash out of the equity in your home, you may not need an appraisal, Garcia says.
“Automated underwriting can drive the decision-making since there is so much data available now,” he explains.
Still, most borrowers should expect home appraisals. This is typically an upfront cost to you.
The lender will usually work with you to set up an appointment. The appraiser will go to your home and take measurements and photos.
“Your house will need to be in good shape, as the lender may not want to close if you’re in the middle of a repair or gutting your kitchen,” Garcia says.
Step 6: Schedule closing. A few more underwriting and behind-the-scenes items will need to be completed by your lender. For instance, the lender will have to work with a title company to get all of the necessary title documentation.
Assuming the appraisal comes in without a hitch, you can get ready to close.
Step 7: Sign documents at closing. Three days before the closing, you should receive the initial closing disclosure, Garcia says. You can compare your estimate with this snapshot of the closing statement.
All that’s left to do is close, which means signing a lot of documents, as you may recall from buying your home.
Step 8: Get set up with your new lender. After you close on the new loan, your escrow company and your former mortgage company will be paid.
You may get a bit of a break on payments as you’re in between mortgage companies. Say you close on March 15; your first payment on the new loan may not be due until May 1.
Your former lender may also reimburse you within 30 days of closing if you had an escrow reserve account.
How Long Does It Take to Refinance Your Mortgage?
From start to finish, the whole process usually takes about 30 days, DeFalco says.
Adds Garcia: But that’s in a normal environment. The interest rate drop has created more demand than banks can handle, which means that closing may take longer.
“The time period is going to be extended because so many people are submitting applications, and lenders are not staffed to handle a short-term increase,” he says.
The best way to speed things up is to be organized with your paperwork. “Be thorough, and it will probably save you time for the rest of the process,” Garcia says.