how to refinance a home

Home Buying

How to Refinance a Home

August 27, 2018 | by Luke Babich

how to refinance a home

Are you wondering how to refinance a home?

Sometimes during the course of home ownership, you realize that your current mortgage payment system is not a good fit for you anymore. This means that it is time to refinance your mortgage.

How to Refinance a Home

Sometimes refinancing your mortgage can feel as difficult and involved as securing a loan in the first place.

Not to worry!

Here is everything you need to know about refinancing a mortgage to ensure more savings and less stress:

What Does Refinancing Mean?

Refinancing means changing a certain aspect of your mortgage to better suit your current financial situation. This might be changing your mortgage’s type, length, or interest rate.

Why Should You Refinance?

Homeowners typically choose to refinance a home because they have improved their financial situation since first purchasing their home. Perhaps they have better credit or a better income.

Either way, refinancing is for people who plan to stay in their homes for a bit and who are not almost finished paying off their home loan anyway.

Because there are costs involved in refinancing, it doesn’t make sense to pay the fees at the end of your loan period.

How to Refinance a Home: A Step-by-Step Guide

Follow these steps to refinance your house:

Step One: Decide What You Want Out of Refinancing

Like we said, one of the first things you need to do when refinancing is determining your end goal. A good idea would be to shorten your loan term while lowering your current interest rate.

It’s not a good idea to extend the term of your loan as this will end up costing you more in extra interest.

Step Two: Obtain Your Credit Score

It’s important to know your credit score during the home refinance process. Be sure to check your credit history and resolve any inaccuracies before moving forward.

A good tip is to begin shopping for potential lenders soon after your initial credit check, as FICO allows many hits within a two-week “shopping period” that won’t bring down your score.

Step Three: Pick Your New Mortgage Type

There are many different types of mortgage refinances.

Cash-out Refinance

Homeowners use a cash-out refinance to instantly gain equity in their homes. In this instance, they would swap their existing mortgage with another worth more than what they owe. They would then get the overage in cash.

Rate Refinance

A rate refinance means that you get a loan with a different (i.e. lower) rate than your original mortgage. If you can secure a lower interest rate, it’s typically a good idea to go for it!

Term Refinance

If you are in a financial pinch, you can change the term of your loan. If you change from a 20-year mortgage to a 30-year mortgage, you will end up paying more over time because of interest fees, but your monthly costs will be lower.

ARM to Fixed

A common form of refinancing is switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM). This is because the interest rates on an ARM can fluctuate, while the interest rate on an FRM is steady, making financial planning easier.

FHA to Conventional

Federal Housing Administration loans require mortgage insurance premiums. Refinancing to a non-government loan when you have 20 percent equity in the home will get rid of those premium payments.

Step Four: Decide if Refinancing your Mortgage is Financially Feasible

Just like closing on your first mortgage, refinancing incurs closing costs. They can range anywhere from $1,500 to $5,000. Typically, expect to pay about 1.5% of your principal loan amount in closing costs when you refinance.

You need to know which fees apply to your specific situation, so you can decide if refinancing will be worth it.

Quick tip: a “no-cost refinance” isn’t always a good thing. This just means that your financial backer is transferring the upfront fees to your ongoing costs for the loan. This usually takes the form of a higher interest rate or a greater loan balance.

Typical refinancing fees include the following things:

Appraisal Fees

Much like when you first purchased a home, when you refinance your mortgage you will hire a tax appraiser to determine the current value of your home.  Depending on the appraiser’s findings, you could get different terms on your new mortgage.

Title Research and Insurance Origination Fees

A title search ensures that no one else holds the legal right to your property. Title insurance protects the lender just in case anyone else files a claim.

Attorney Fees

Some states require that an attorney be present at all closing proceedings. If your state does, be sure to budget for this expense.

Flood Certification Fee

This preventative measure is mandatory in some areas.

Document Processing / Recording Fee

Your home’s city or county might charge this small administrative fee for handling the paperwork.

Mortgage Application Fee

When you refinance a home, you close out your first mortgage and open a completely new account. Because of this, you usually have to pay an application fee.

Loan Origination Fee

This fee typically runs about 1% of the total value of your loan.

Step Five: Pick Your Lender and Submit Your Application

After preparing yourself by collecting all the paperwork and budgeting for the fees, it’s time to move forward. Once you’ve picked your lender, consider locking in your interest rate, so that it cannot go up during your negotiations.

To help the process along, you will typically need to submit the following documents to your lender:

  • Driver’s license
  • Social Security card
  • Most recent 2 months of bank statements
  • Most recent 30 days of pay stubs
  • Most recent 2 years of W-2s
  • Most recent 2 years of federal tax returns

This whole process is normally over within a few weeks. It ends with you signing the new loan documents. If you went with a cash-out refinance, you’ll get your money at this time.

Whether you are buying a home, selling a home, or thinking to refinance a mortgage, the experts at Clever are here to help.

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