What Happens When You Refinance Your Home Loan?
This could be the right time for you to refinance your home loan. You’ve had the same mortgage for several years now, and you’ve built up home equity. What will happen when you refinance? How do you get this process started, and what does it include? Here’s what you need to know about the process of refinancing your home loan.
What Is a Home Refi?
Refinancing your home essentially means trading in one mortgage for another. Most homeowners refinance to take advantage of a change in interest rates to lower their monthly payments, shorten the term of their mortgage, or take some cash out of their home for other purposes. You may refinance with the same lender or change lenders.
There are a lot of reasons you might want to refinance your home. Regardless of the reason, the steps to refinancing are the same. Once you’ve decided a refi is right for you, here’s what you can expect:
What Does It Cost to Refinance?
Remember when you bought your house initially, you scraped together as much cash as you could for the down payment so your monthly mortgage payment would be lower? When you refinance, the equity in your home acts as the down payment.
There are other costs associated with refinancing your home loan. You will have to pay for an appraisal, title insurance, application fee, and loan origination fee. There could be loan origination and recording fees. If you have less than 20% equity in your home, you will have to pay private mortgage insurance (PMI). You can expect to pay between 2% and 5% of the total loan amount in closing costs. Depending on the type of refinance loan you choose, you may be able to roll some closing costs into your mortgage and pay them off over time.
5 Steps to Refinancing Your Home Loan
If the process of refinancing your home feels vaguely familiar, that is because it is the same as when you bought your home initially. Even if you have only had your current mortgage a short time, you will still need to go through these steps to complete a refi:
1. Apply for a Mortgage Refinance
Your financial institution can guide you to the mortgage that is right for your refinancing goals. They will collect your financial and property documentation, including pay stubs, W-2s, bank statements, property title, and insurance information. You will need to provide income and credit information for anyone you want to put on the mortgage. The names on the mortgage do not have to match those on the deed or the current mortgage, but you might want a legal opinion before making any changes.
2. Lock in the Best Interest Rate
Because rates fluctuate frequently, you may want to lock in the rate the day you submit your application. Locking it will hold that rate, even if rates change before closing. If you don’t lock in the rate, it might be higher on the day you close the loan. The rate lock can hold for anywhere between 30 and 120 days, during which time you’ll want to complete your closing. Some lenders offer a float-down option that allows you to renegotiate your locked rate if average interest rates are lower when you are ready to close the loan.
3. Prepare for a Home Appraisal
Your lender will order an objective appraisal of your home’s fair market value. You will be responsible for the cost of the appraisal. The appraisal will consider things like features of your property, details about local comparable properties, and market price trends. It is a good idea to prepare for the appraisal by finishing any home improvement projects you started, doing minor repairs, and making a list of any upgrades you’ve made since you bought the property. The appraised value of your home affects the terms of your refi.
4. Wait for the Underwriting to Be Completed
Your financial institution will review the financial and property information they’ve collected to determine how much they can lend you and on what terms. Any upfront payments you will need to pay at closing will be determined during the underwriting part of the refinance process, and a closing disclosure listing those costs will be provided to you. You will also be provided with information about your new mortgage loan, such as what your monthly payment will be, the mortgage balance and payment terms, and the annual percentage rate (APR), which is the cost for borrowing the money.
5. Close on Your New Mortgage Loan
Closing is the big day, but this time all your possessions aren’t in a moving truck at the curb, so there’s no pressure. During closing, you will sign your disclosure and other legal paperwork and pay your closing costs. If you are due a cash-out, you will receive that money a few days after the closing.
The process of refinancing your home usually takes between 30 and 45 days to complete. Get started by applying today or trying our free calculators to see if refinancing is the right choice for you.