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Mortgage refinance: How to get started
A mortgage refinance involves replacing your existing home loan with a new mortgage for the same property. The funds from your new mortgage are used to pay off your existing loan, and you start making mortgage payments on the new one instead.
There are many reasons to refinance your mortgage loan. You may want to reduce your interest rate, lower your monthly mortgage payment, avoid paying mortgage insurance premiums, or borrow from the equity you’ve built up in your real estate.
Here’s when you might want to consider a refinance — and how to make it happen.
Dig deeper: Is now a good time to refinance your mortgage?
How to refinance your mortgage
1. Prepare your finances
First things first: Make sure you're financially ready to refinance. This can ensure that you are not only approved but that you get the lowest mortgage rate possible.
Check your credit score and see if there are ways to improve your score before refinancing, if necessary. Calculate your debt-to-income ratio and consider paying down some debts. Finally, make sure you have enough money to cover closing costs comfortably.
Read more: Is it time to refinance your mortgage? Here's how to prepare.
2. Choose your type of refinance
There are several types of mortgage refinances. Determine what goal you hope to achieve by refinancing — this will help you decide which kind of refinance to pursue. Here are your options:
Rate-and-term refinance
A rate-and-term refinance replaces your current mortgage with a new one, and you'll replace your interest rate and term length. It's a good option if you want a lower interest rate, shorter term, or lower monthly payments.
Learn more: Rate-and-term refinance — What it is and how it works
Cash-out refinance
With a cash-out refinance loan, your new loan amount is significantly higher than your current loan's outstanding balance and the difference is paid to you in cash. This type of refinance reduces your equity in your home, but allows you to use the cash for home improvements or other expenses.
Dig deeper:
Streamline refinance
A streamline refinance occurs when you replace your current loan with a new loan of the same type, and the paperwork and documentation requirements are simplified. Three types of loans that allow streamline refinancing are FHA loans, VA loans, and USDA loans.
Read more:
Cash-in refinance
A cash-in refinance is essentially the opposite of a cash-out refinance. Instead of taking out a larger mortgage and receiving cash, you put more money down when you refinance so you can take out a smaller mortgage. This results in lower monthly payments and less interest paid over the life of the loan.
Learn more: What is a cash-in refinance, and how does it work?
No-closing-cost refinance
As the name suggests, a no-closing-cost refinance means you don't have to pay any fees at closing. However, the lender will usually make up that money from you in one of two ways: They'll either roll the closing costs into your mortgage principal, or they'll cover the closing costs but charge you a higher interest rate in return.
Read more: How a no-closing-cost refinance works — and how to get one
Short refinance
A short refinance is an option when you're underwater on your mortgage, meaning you owe more on your loan than the house is currently worth. This type of refinance replaces your current home loan with one for less than what you owe. Your monthly payments will be lower, and you get to stay in your house. Some lenders will agree to a short refinance because even though it isn't ideal, it can be a better deal for them financially than going through the foreclosure process.
Dig deeper: What is a short refinance, and when should you get one?
Reverse mortgage
A reverse mortgage isn't technically a type of refinance, but there are some similarities. Like a cash-out refinance, you tap your home equity using a reverse mortgage. Rather than making payments to a lender to pay down your loan, you'll receive money, and your debt will increase. A reverse mortgage is an option for senior citizens that allows them to have more money in retirement.
Read more: What is a reverse mortgage?
Choosing your type of home refinance can ensure you meet your goals. Do you want lower monthly payments? You may want a rate-and-term refinance with a longer term length. Do you need access to money? A cash-out refinance could be a good fit. Are you struggling to afford your mortgage? Ask lenders about a short refinance.
Dig deeper: Want to refinance your mortgage? Here are 7 home refinance options.
3. Pick a refinance lender
You can refinance with the same lender you used for your first mortgage, but you don't have to. Shop around for mortgage lenders with the lowest rates and fees. Narrowing down your list could be easier once you decide which type of mortgage refinance you want and which type of loan you want to refinance into.
Learn more:
4. Decide whether to lock in your interest rate
Depending on your mortgage lender, you may be given the option to lock in your mortgage rate so it doesn't change before closing day. If interest rates are trending up, you may want to lock in your rate so you don't get stuck with a higher rate. If rates are trending down, you can let your interest rate float in hopes of snagging a better one at closing.
Dig deeper: Should you lock in a mortgage rate — and if so, when?
5. Get an appraisal
Just like when you bought your home, you'll need to get a home appraisal to determine the market value of your home. This helps the lender decide how much to loan you and ensures you both get a good deal.
Learn more: How a home appraisal works
6. Close on your new mortgage
Once you have gone through all the steps, you get to close on your new mortgage! This will feel similar to when you closed on your original home loan — but maybe less exciting since you already have the keys to your house.
When to refinance your mortgage
Refinancing can help you achieve many goals. Here are times it may be a good idea to refinance your mortgage:
Interest rates have decreased
If current mortgage rates are lower than the rate on your existing mortgage, you may save money by refinancing to a lower interest rate. Your monthly payment may also be lower.
The free Yahoo Finance mortgage calculator could help you estimate how much of your monthly payment would be applied to principal and interest with a lower rate. You can also use a refinance calculator to determine if refinancing is the right move. This requires calculating the break-even point — or the amount of time before the refinance saves you more than it cost.
Learn more: 5 strategies for getting the lowest mortgage rates
Your credit score has improved
Is your credit in better shape than when you bought your house? Then you may be able to snag a lower interest rate or even qualify for a different type of loan. For example, with a higher credit score, you might now be eligible to refinance from an FHA loan to a conventional loan — and if you have enough home equity, eliminate for paying mortgage insurance by doing so.
You want a new loan term
With a shorter term, such as 15 years instead of 30, your payment typically will be higher, but you should pay less interest expense over the lifetime of your loan. With a longer term, say 30 years instead of 15, your payment typically will be lower, but you'll probably pay more interest expense over your loan's lifetime.
You have gained equity in your home
Increased home equity can be a great reason to refinance. First, you could refinance into a conventional loan that won't charge private mortgage insurance (PMI) if you have at least 20% equity. Second, you can get more money in a cash-out refinance if your value is higher.
You can eliminate mortgage insurance
As mentioned above, refinancing into a conventional loan with at least 20% equity will eliminate private mortgage insurance. This can also be a good option if you currently have an FHA loan, because FHA loans typically charge mortgage insurance premiums for the entire life of your loan. If you refinance into a conventional loan, you can get rid of that extra cost.
You want to switch between an adjustable-rate and fixed-rate loan
A fixed interest rate protects you from rate fluctuations that could trigger a higher payment with an adjustable-rate mortgage. An adjustable rate can give you a lower payment for an initial set period, after which your payment may increase if rates move higher. Switching from one to the other can be a solid reason to refinance.
Read more: 6 times when it makes sense to refinance your mortgage
One reason not to refinance
One time when you may not want to refinance is when you're planning to sell your home in the next few years. In that case, the benefits of refinancing may not outweigh the costs and the time involved to complete the refinance process.
Dig deeper: The pros and cons of refinancing your home
How soon can you refinance your mortgage?
So, how long do you have to wait to refinance your current mortgage after buying your house (or since your last refinance)? It depends on the type of loan you have. Here is the waiting period for different types of mortgages and refinances:
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Conforming loan refinance: None
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Jumbo loan refinance: None
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Cash-out refinance (conforming, jumbo, FHA): 12 months
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VA cash-out refinance: 210 days
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FHA or VA Streamline Refinance: 210 days
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USDA loan refinance: 12 months
Even with conforming and jumbo loans that don't have a mandatory waiting period, some mortgage lenders impose a seasoning period — say, six months — before they'll let you refinance. The best way to get around this rule is to refinance with a different company.
Learn more: How soon can you refinance a mortgage after buying a home?
How many times can you refinance your mortgage?
You can refinance your home as many times as you want. Just keep two things in mind: First, you'll need to adhere to the aforementioned waiting periods before doing so. Second, you have to pay closing costs each time you refinance, so it can get expensive if you do it multiple times.
Read more: How many times can you refinance your home?
How long does it take to refinance your home?
According to ICE Mortgage Technology, closing on a refinanced mortgage typically takes 42 days. To speed up the process, have your documentation — such as tax returns and bank statements — ready for when your lender asks for them. You should also respond to your lender's questions as quickly as possible to avoid delays.
Dig deeper: How long does it take to refinance a house?
Refinancing and your credit score
How to refinance with a bad credit score
You can still refinance even if your credit isn't stellar. You have several options, such as pursuing a streamline refinance (which usually doesn't require a hard credit pull), adding a co-signer with a strong credit score, or choosing a mortgage lender that accepts poor credit scores.
Learn more: 9 options to refinance your mortgage with bad credit
Does refinancing hurt your credit score?
Refinancing may hurt your credit score because the mortgage lender will likely do a hard credit pull. However, these hard credit inquiries usually dock your score by less than five points, and although they stay on your credit report for two years, they only affect your score for one year. There are other ways refinancing could potentially hurt your credit score, but the effects are fairly negligible.
Learn more: Does refinancing your mortgage impact your credit score?
How to refinance a mortgage: FAQs
What is refinancing a mortgage?
Refinancing a mortgage means replacing your original one with a new one — one that could have different terms or rates. You then use the funds from your new mortgage to pay off your old one.
Is it a good idea to refinance a mortgage?
Refinancing a mortgage can be a good idea if it will help you financially. For example, if you can get a lower mortgage rate by refinancing, you could save money on your monthly payments and pay less in interest in the long run. But it usually isn't a good idea to refinance if you plan to move soon because the amount you save probably won't make up for the amount you pay up-front in closing costs.
Is it hard to refinance a mortgage?
It can be hard to refinance a mortgage if you're in a tough financial spot because you might not get the terms you want. Otherwise, refinancing isn't necessarily harder than getting your original mortgage. Lenders will require a certain credit score, loan-to-value ratio (LTV), and debt-to-income ratio (DTI), though these vary by company and loan program.
