If your monthly house payment is too steep, or you have an adjustable-rate mortgage and want to switch to a fixed rate, or you need cash to replace a leaky roof or cover a child’s education, refinancing your mortgage can be a great solution.
There are two main ways to refinance a mortgage:
- Rate-and-term financing: Typically, the remaining balance is refinanced for a lower interest rate or a shorter loan term, such as going from a 30-year loan to a 15-year to save money and build equity faster.
- Cash-out refinancing: The homeowner borrows against his equity and takes out a new mortgage for more than what is owed, then gets the difference in cash or uses it to pay higher-rate debts, such as credit cards.
If you’re still on the fence about refinancing, now is the time to decide. Mortgage rates are rising, but they’re still at historic lows.
The benchmark 30-year fixed-rate mortgage was 4.64 percent in Bankrate’s May 30 survey of large lenders. If you bought a $200,000 home, paid 20 percent down ($40,000), and got a conventional 30-year mortgage for $160,000, your monthly principal and interest payment would be about $824.
At the end of the loan term, you would have paid the lender $136,662 in interest.
Ten years ago, that same house would have cost you about $962 a month. In 2008, mortgage rates averaged 6.03 percent, according to Freddie Mac data. Interest payments over the life of the loan would total $186,453.
That’s a difference of almost $50,000 in interest. A seemingly small gap in interest rates makes a big difference over time. Use Bankrate’s amortization schedule calculator to compare interest charges.
Refinancing your mortgage can be time-consuming and expensive. Knowing what to expect before you get started can make the process easier and faster.
7 steps to refinancing your home loan
- Step 1. Check your credit
- Step 2. Choose a lender
- Step 3. Make the application for the loan
- Step 4. Submit your documents
- Step 5. Get an appraisal
- Step 6. Sign your loan docs
- Step 7. Closing
Having so-so credit doesn’t mean you can’t refinance, but having good or excellent credit will get you a lower interest rate for your new loan. Review your credit reports before you apply. You are entitled to a free copy of your report every 12 months from each of the major credit bureaus — Experian, Equifax and TransUnion — at AnnualCreditReport.com. If you find any mistakes, get them corrected. That will boost your credit score.
Get your free credit report and credit score today at Bankrate.com.
Many banks, mortgage companies, credit unions and loan brokers can help you refinance, so it’s a good idea to shop around and talk to a few lenders before you pick one. Choose someone who’s knowledgeable about different loan programs and patient in answering your questions. Getting a low rate shouldn’t be the only reason for choosing a lender.
The next step is to fill out the loan application and review the Loan Estimate you should have received from your lender. The Loan Estimate summarizes the details of your loan offer. Your lender will ask you to provide proof of your income and check your credit.
Ask your lender to help you decide whether to lock your rate or float your rate. If your rate is locked, it won’t change unless the terms of the new loan change. If you let your rate float, it could end up being lower or higher.
Use our mortgage refi calculator to help you decide whether refinancing is right for you.
You’ll have to supply your lender with a lot of paperwork. Expect to provide your W-2 tax forms if you’re an employee, income tax returns or profit-and-loss statements if you’re self-employed, homeowners insurance policies, and possibly a driver’s license or passport.
Always give your lender every page of every document, even if a page is blank.
An appraisal of your home will be required for you to refinance. The lender will order the appraisal, and the appraiser will visit your home and take notes and pictures. If the appraiser thinks your home is worth more or less than you and your lender expected, the terms of your loan could change. Be sure to read your updated Loan Estimate and ask your lender if you have any questions.
Once you’ve submitted your paperwork and the home appraisal is done, your loan should be ready for your lender’s final approval. At this time, you’ll receive a Closing Disclosure form, which you must review, sign and return to your lender.
You then sign your loan documents. You might do this electronically online or at the office of the title company or closing attorney. Closing a loan involves a lot of documents, so it could take an hour or more for you to sign all of them.
The last step is known as the closing. Your lender will verify your credit and employment again to make sure nothing has changed during the loan process. If everything is in order, your existing home loan will be paid off and your new one will be recorded with the appropriate government records office in the county where your home is located. Expect to pay some closing costs.
If you decided to cash out some of your home equity, you’ll receive a check or wire transfer of the funds. Your lender will update you on how and when to make your new monthly mortgage payment.