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Mortgage refinance industry insights

How does mortgage refinancing work?

When you refinance your mortgage, you replace your existing loan with a new one. The process is similar to applying for a purchase mortgage: You’ll submit to a credit check, verify your income and possibly pay for an appraisal. At the end of the process, your new lender pays off your original mortgage, and you’ll then make monthly payments on the new loan.

How to refinance your mortgage in 5 steps

If you can get an adequately lower rate, refinancing can save you a substantial amount in interest charges, but it does require some work:

1. Check your credit score

A better credit score will help you secure a better rate and make your refinance even more cost-effective. If you're not happy with your credit score or the rates you're being quoted, work on boosting your credit first, then try to refinance again once you've improved it. Typically, mortgage lenders want to see a credit score of 620 or better for a refinance, but there are some refinance options if you have poor credit, including streamline programs. You can improve your credit score by reducing your credit utilization ratio (the proportion of credit you’re using compared to your credit limit) and paying down your highest-interest or highest-payment debt.

2. Calculate the cost vs. savings of refinancing

One of the most important factors in refinancing is figuring out your break-even timeline. A refi usually comes with upfront costs at the closing, just like an initial mortgage, and those can add up. If you're not planning to stay in your current home for more than a few years, the savings you get from a lower rate might not outweigh those costs before you move. Bankrate's refinance breakeven calculator can help you figure out this timeline.

3. Find the best refinance rates today

It's just as important to shop around when you refinance as it was when you applied for your first mortgage. Explore refinance offers from at least three mortgage lenders (your bank or current lender might be good places to start), and keep an eye on rates while you comparison-shop — this can help you decide when to lock in a rate. Check out Bankrate's lender reviews, as well, to help guide your decision.

Compare the best mortgage refinance lenders.

4. Get your paperwork in order

Once you've identified a lender, find out what paperwork you need in order to complete a refinance application. Among the requirements, your lender will want to review tax returns, pay stubs, W-2s and other proof of income, as well as documentation about any assets such as savings.

5. Prepare for closing on your mortgage refinance

Refinancing isn't quite as hard as shopping for a house, but it still takes some time. While your new loan is processing, don't open new credit accounts or make other large purchases. Doing so can derail your application.

Follow this guide to refinance your mortgage.

How to get the best mortgage refinance rate

Shopping around for quotes is key for every mortgage applicant. When you shop, consider not just the interest rate, but also all the other terms of the loan. Be sure to compare APRs, which include many additional costs of the mortgage not shown in the interest rate. Some lenders offer lower closing costs and fees than others, or your current bank or credit union might extend you a special offer. Don’t be afraid to walk away from your current lender if you find a better deal elsewhere. Consider working with a mortgage broker, who can help you compare offers from several lenders.

Here’s how to get the best refinance rate.

Pros and cons of refinancing

Refinancing can be a smart move, whether it helps you secure a lower rate or tap your home equity to fund a home renovation or other project through a cash-out deal.

Pros of mortgage refinance

• You can lock in a lower rate by refinancing, which can reduce your monthly payments and put some money back in your budget.
• If your home’s value has increased, you might be able to stop paying private mortgage insurance (PMI), which will also lower your monthly expenses. PMI should end automatically once you get to at least 20 percent equity owned free and clear, but it’s usually a good time to consider a refinance once that happens, too.
• If you need money for renovations, a cash-out refi offers relatively cheap capital. It can make your monthly payments more expensive, but home improvements tend to boost your equity value even more.

Cons of mortgage refinance

• Refinancing costs money. Closing costs can total 2 percent to 5 percent of the amount of the mortgage, which is why it’s so important to make sure you’ll recoup those costs before you move.
• If you refinance from a 30-year loan to another 30-year loan, you’ll extend your repayment period. A new loan restarts the repayment clock.

Should you refinance your mortgage?

You should refinance if doing so will help you to save money, build equity or pay off your mortgage faster. For example, if interest rates have dropped since you closed your mortgage, you could do a rate-and-term refinance to obtain a lower rate. In addition to a lower rate, you could save by eliminating PMI, or tap your home’s equity via a cash-out refinance. When rates are low, however, it’s important to consider your future plans. If you expect to sell your home in the foreseeable future, for instance, it might not make sense to start over with a new loan.