A mortgage refinance is the process of replacing your existing home loan with a new one. People frequently refinance to lower their interest rates, reduce their monthly payments, or access the equity in their homes. Others refinance a home to repay the loan faster, avoid FHA mortgage insurance, or switch from an adjustable rate to a fixed-rate loan.
Let’s consider how refinancing works — and then walk through the process step by step.
How Does Refinancing Work?
A mortgage is obtained to finance the purchase of a home. The money is transferred from the lender to the home seller. When you refinance your home, you receive a new mortgage. Instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan.
Mortgage refinancing necessitates qualifying for the loan, just as you did for the original mortgage. You apply, go through the underwriting process, and then close, just like you did when you bought the house.
Steps to Refinance a Mortgage
– Set a goal
Set a refinance goal before shopping for mortgage refinance rates. Do you want to lower your monthly payments? Reduce the loan term? Get rid of FHA mortgage insurance?
– Compare prices
After deciding on a goal, look for the best mortgage refinance rate. Keep an eye on the fees as well.
– Apply for a mortgage
Next, apply for a mortgage with three to five different lenders. While the first lender’s credit check will almost certainly lower your score slightly, subsequent inquiries inform lenders that you’re rate-shopping and should not harm your score any further. Submit all applications within two weeks to reduce the impact on your credit score.
– Select a refinance lender
Compare the Loan Estimate documents each lender provides after you apply to find the best deal. The Loan Estimate will inform you of the amount required for closing costs.
– Lock your interest rate
When you lock in an interest rate, it cannot be changed for a set period. You and the lender will try to complete the loan before the rate lock expires.
– Close the loan
This is when you’ll pay the closing costs detailed in the Loan Estimate and the Closing Disclosure. Closing on a refinance loan is similar to closing on a purchase loan, with one significant difference: In the end, no one hands you the keys to the house.
