Want to Refinance Your Home? Here’s What to Do

Refinancing your home can be a great way to save money if you’re stuck paying high interest rates on your current mortgage or want to access some of your home equity. But how do you refinance your home? First, you need to time your decision right and make sure you’re in a financial decision to do so.

We’ll look at how to refinance your home, when you should do it, how often you can do it, and what documents you’ll need. 

When should I refinance my home?

You should refinance your home when it makes sense for your personal situation, based on advice from financial advisors and your mortgage lender. You’ll generally want to avoid trying to time the market since market fluctuations can be unpredictable. Instead, focus on the following factors when deciding to refinance:

• Lower interest rates: Locking in a lower interest rate is one of the most popular reasons to refinance. Current average mortgage rates are 6.17%, compared to 6.72% a year ago and 2.81% five years ago. While the rule of thumb is to refinance if you can get at least a 1% reduction in your interest rate, even 0.5% to 0.75% can make sense if you plan on staying in your home for a long time. Divide your refinance closing costs by your monthly savings to determine how many months it will take you to break even.
• Accessing equity: With a cash-out refinance, you can access some of your home’s equity, which can be used for home renovations, debt consolidation, and emergency funds, while also potentially securing a better rate. However, be aware that cash-out refinance loans typically have higher interest rates than standard rate-and-term refinances.
• Switching loan types: Refinancing allows you to switch between a fixed-rate and an adjustable-rate mortgage. By switching, you can take advantage of the stability that a fixed-rate mortgage provides or the potentially lower rates you might get from an adjustable-rate mortgage.
• Change your loan term: You can also change the length of your loan term through refinancing. For example, switching from a 30-year to 15-year term helps you build equity faster and saves you thousands in interest, although you’ll be paying more each month. Alternatively, choosing a longer loan term will reduce your monthly payments, although you’ll spend significantly more on interest in the long term.

When you should avoid refinancing

Refinancing doesn’t always make sense, even if it gets you a lower interest rate. If you’re planning on selling your house soon, refinancing could end up costing you money. You likely won’t have enough time to have made your investment worthwhile compared to your closing costs.

Refinancing is also not always a great solution if you can’t afford your house anymore. While it may provide temporary relief by lowering your interest rates or extending your repayment period, you’ll want to talk to a financial advisor to make sure you’re addressing any deeper financial issues.

Can I refinance my home with bad credit?

You’ll typically need a credit rating of at least 620 to refinance—and you’ll only get the best rates and terms if your credit rating is over 700. But options exist for refinancing with bad credit, especially if you’re looking for financial relief from high interest rates. Always talk with your mortgage lender to get the full scope of what’s available to you with bad credit.

If you have a government-backed FHA or VA loan, you’ll have the most options for refinancing with bad credit. The FHA Streamline Refinance program allows you to refinance your FHA loan with minimal credit checks and it sometimes accepts credit scores as low as 580.[1]

Similarly, if you have a VA loan, you can apply for the Interest Rate Reduction Refinance Loan (IRRRL), which factors in your payment history more than your credit score.[2]

Credit unions also tend to be more flexible with refinancing applications, especially if you’ve been a long-time member and have a history of making payments on time. 

Also, the strategies that you use to buy a home with bad credit apply to refinancing. Try working to increase your credit score by reducing your debt and making on-time payments. An increase of just 20 to 30 points can have a big impact on your rate.

If your main concern is with your debtload rather than your credit score alone, consider high DTI mortgage lenders who may be able to work with you.

How often can I refinance my home?

There’s no legal limit to the number of times you can refinance your home. However, practical considerations will determine whether or not continuously refinancing makes sense.

Many lenders have seasoning requirements, which mean you’ll have to wait a minimum number of months before refinancing again. The typical waiting period is six months, although this varies by lender and loan type.

Also, refinancing comes with closing costs of around 2-5% of your loan amount. You should only refinance well after you’ve reached your break-even point, which is the number of months until your savings match your closing costs.

Refinancing can also negatively affect your equity. Each refinance resets your amortization period, which means you could end up taking even longer to pay off your mortgage and pay more interest over time, even if you lower your rate.

That said, refinancing often can make sense. Significant rate drops can justify frequent refinances. And if you’re shortening your loan term when you refinance, you’ll avoid the trap of negatively affecting your equity.

What documents do I need to refinance my home?

The documents you need to refinance your home are largely the same as what you needed when applying for your original mortgage. They include the following:

• Recent pay stubs
• W-2 forms
• Tax returns
• Bank statements
• Statements for other assets, like insurance or retirement savings
• Current mortgage statement
• Property tax bill
• Homeowners insurance policy
• Government-issued ID

In specific situations, you may also need profit and loss statements or business tax statements if you’re self-employed, or lease agreements and Schedule E forms if you have rental income.

Step-by-step process for how to refinance your home

Being prepared will help the refinance process go smoother and help you avoid common pitfalls and delays. Here’s a step-by-step guide you can expect from most refinance lenders.

Step 1: Define your goals.

The first step is to define your reasons for wanting to refinance your home. Are you trying to lower your monthly payments, reduce your interest rates, pay off your loan faster, eliminate PMI, or access equity? Your reason will determine what type of refinance loan you apply for and which lender is best suited to your needs.

Step 2: Find out your home’s current value.

Just like with a conventional mortgage, you’ll likely need an appraisal to get a refinance loan. While the appraisal is usually ordered by the lender, you’ll want to have a rough idea beforehand of what your home is worth. Many lenders will only offer refinancing to borrowers who already have at least 20% equity.

You can order your own appraisal, but this will cost money. An online home value estimator will give you a rough idea of your home’s market value, just be aware of the difference between appraisal value vs. market value. 

Step 3: Check your credit rating and DTI.

Your credit rating will be one of the most important factors that lenders look at when deciding whether or not to offer you a loan and at what rates and terms. Make sure to pull up your credit report and check for errors. Ideally, you’ll want your credit rating to be above 700, but you’ll typically need a score of at least 620 to refinance.

Use this opportunity to also calculate your debt-to-income (DTI) ratio by dividing your total monthly debt payments by your gross monthly income. You should aim for a DTI ratio below 43%. If either your credit score or DTI needs work, consider waiting a few months before applying for refinancing and focus on reducing your debt and making monthly payments.

Step 4: Begin comparison shopping.

You’ll increase your chances of getting the best refinance rate and terms by comparing multiple lenders. Don’t limit yourself to traditional banks — credit unions and online lenders often offer competitive rates. Also, check with your current mortgage lender to see if they have special deals for existing customers. Or you can consult a mortgage broker to compare multiple options at once.

When comparison shopping, remember that the interest rate is only part of the story. It’s more useful to compare APR, which includes interest plus fees, to give you a true understanding of your total costs. Also, ask about closing fees, which can be substantial and which will largely determine how long it will take you to break even if you’re trying to get a lower rate.

Step 5: Lock in your rate and apply.

When you’ve decided on a lender, make sure to lock in your rate. This will prevent your rate from going up during the application process. You can typically lock in your rate for 30 to 60 days. You can also ask about float-down options, which will lower your rate during the lock-in period if they drop.

With your rate locked in, you can begin the formal application process. You’ll need documentation for this step, including pay stubs or income verification, bank statements, mortgage documents, and identification.

Step 6: Prepare for the home appraisal.

Most lenders will require a home appraisal to approve you for a refinance. The appraisal verifies the value of your home and it reassures lenders that if you default, your home’s value will cover the loan amount. The appraisal will be ordered by the lender.

To prepare for the appraisal, make sure to clean your property, tidy away any clutter, and fix minor repairs. The appraisal will typically take one to two weeks to complete from when you first apply.

Step 7: Begin the underwriting process.

The underwriting process is when a loan processor reviews all your documents and verifies your financial information. Be sure to respond quickly to any requests for additional documentation.

Since the underwriting process is designed to assess your ability to take on a new loan, you’ll want to be careful with your financial decisions. Avoid making any large purchases, applying for credit cards or other loans, or switching jobs. These moves can attract additional scrutiny.

Step 8: Proceed to closing.

Once the underwriting process is complete, you’re cleared to close and you’ll receive a Closing Disclosure form to review. By law, you must receive this document at least three days before closing. The document includes your loan terms, closing costs, and monthly payments. Review it carefully to make sure it matches what you originally agreed to.

At closing, you’ll sign the refinance documents and pay any closing costs that weren’t already rolled into your new loan. You’ll typically have a 72-hour period to cancel your refinance after you close. Once these 72 hours pass, you’ll receive your new mortgage funds and your old mortgage will be paid off.

Is refinancing right for you?

If you’re trying to decide whether to sell your home or refinance, you should talk to a real estate agent first. An experienced realtor can help you decide if selling your house is the right move or if you’d be better off refinancing.

If you decide to sell, Clever can help by connecting you with multiple top realtors in your area. You’ll get full-service support from a licensed Home Concierge who will check on you throughout every step of the process and make sure your agent matches are the best for you. When you list with Clever, you can also pay just 1.5%, which will save you thousands. Get matched with Clever agents near you.