How to refinance your mortgage: A step-by-step guide
You made it through the hardest part: buying a home. Now, perhaps just a few years later, you鈥檙e ready to聽. How hard can it be? You may be surprised to find that it鈥檚 not a couple-of-emails and a-phone-call-or-two process. In fact, there may be more paperwork involved this time around than when you first bought, especially if you went through the mortgage process in the 鈥渓ow-doc鈥� days.
Let鈥檚 consider some important initial steps of a mortgage refinance 鈥� and then run through the process step by step.
The first step: Your mortgage refinance strategy
Before you begin, it鈥檚 important to consider why you want to refinance your home loan in the first place. That guides the process from the very beginning.
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Lowering your payment is usually the goal.聽And it鈥檚 tempting to refinance with another full 30-year term to really knock down that monthly payment. But that means you鈥檒l end up taking even longer to pay off your house and paying more interest. You鈥檒l want to take into account 聽how much interest you鈥檝e already paid on your old loan and how much you鈥檒l pay with the refinance.
Loans are front-loaded with interest, so the longer you鈥檝e been paying, the more each payment is going toward聽paying off the聽principal balance. By resisting the urge to extend your loan term (or, better yet, reducing it) and getting a lower interest rate, you can significantly reduce the amount of interest you pay over the life of the loan.
Choosing a suitable loan term for your mortgage refinance is a balancing act between an affordable monthly payment and reducing your borrowing costs.
Use a mortgage refinance calculator
Once you know you have聽a good reason and you鈥檝e determined it鈥檚聽the, it鈥檚 time to work the聽numbers. Using a refinance calculator, like the one聽, can help you shop for the best mortgage.
You鈥檒l need to know (or make some educated guesses about) the fees you鈥檒l pay, your new interest rate and your new loan amount. There is even an option to roll the fees into the new loan under the 鈥渁dvanced鈥� options of the tool.
Once you input the data, the tool will calculate your monthly savings, new payment, lifetime savings and the number of months until you聽break even, considering the costs of your refinance.
Working with a聽refinance calculator will give you a good idea of what to expect. Even better, when you have聽a few estimates from mortgage lenders you can use the calculator to help determine聽who offers the best deal.
It鈥檚 also key to shop the best refinance rates
Now it鈥檚 time for a little legwork 鈥� or more likely Web work and聽phone calls. You want to shop for your听补苍诲 get a聽. Each potential lender is required to issue the estimate within three days of receiving your basic information.
The estimate is a pretty simple聽that details the loan terms, projected payments, estimated closing costs and other fees.
Compare the loan details from each lender and decide which one is best for you. This is聽a good time to really work that mortgage refinance calculator we just talked about.
President Obama鈥檚 refinance program
And while you鈥檙e shopping lenders, you may want to consider whether a government-sponsored mortgage program can be a part of your refinance solution. President Obama and Congress established the federal聽in 2009 to help revitalize a housing industry crushed by the financial crisis.
HARP 鈥� originally called the Making Home Affordable program 鈥� allows homeowners to refinance their mortgage no matter how little equity they have in their home. There are some restrictions: Homeowners must have conventional mortgages (loans owned by Fannie Mae or Freddie Mac) and they need to be current on their payments.
You can determine if your mortgage is held by Fannie Mae or Freddie Mac by checking聽听补苍诲.
The Federal Housing Finance Agency estimates more than 429,000 borrowers nationwide remain eligible for a HARP refinance. More than 3.3 million borrowers have already refinanced their homes through the program, which has been extended several times but will expire on Dec. 31, 2016.
Refinancing your home loan, step by step
Ready to tackle the whole refinance process? Go!
- Determine your goal.聽We鈥檝e covered this: Refinance for the right reason. Aim to shorten 鈥� or at least maintain 鈥� your current loan term while lowering your interest rate.
- Learn your current credit score.聽Check your credit history and聽. The better your score, the better the mortgage refinance interest rates you鈥檒l be offered.
- Research your home鈥檚 current value.聽Check your neighborhood for sales of recent homes like yours. Look up your home鈥檚听补苍诲 other.
- Shop for your聽But do all searching聽within a聽so you don鈥檛 cause your credit score to dip a bit.
- Know your all-in costs.聽A home loan refinance聽can trigger聽a bunch of fees: application fees, the cost of an appraisal, origination fees, a document processing fee, an underwriting fee, a credit report charge, title research and insurance, recording fees, tax transfer fees and points, to name several.聽But remember, you鈥檒l get a clear聽聽from each lender you consider. And don鈥檛 jump blindly for a 鈥渘o-cost refinance鈥� pitch. That means the lender is moving the upfront fees to your ongoing costs for the loan, in the form of a higher interest rate.
- Gather paperwork.聽This can be a bit harder these days because so many of us do our financial business online. But you鈥檒l have to gather, print or download statements, pay stubs, and whatever else the lender will need during the loan process.
- Lock your rate.聽You鈥檒l have to decide whether or not, and when, to. For the logically minded, it鈥檚 a hand-wringer 鈥� more art than science.
- Have cash on hand.聽There are likely to be property taxes and insurance, closing costs and other expenses to pay at closing, so be sure to set aside enough to cover them. Again, it鈥檚 listed in your loan聽estimate, so there should be no surprises.
A final tip
Remember to consider how long it will take for you to recoup the fees and expenses of a refinance. That was one of the outputs from the mortgage calculator we mentioned (the 鈥渂reak even鈥� estimate).
But refinancing 鈥� for the right reason, with a good rate and a suitable term聽鈥� can enhance your financial position.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email:聽hal@nerdwallet.com. Twitter:聽
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