The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. Let's walk through each step of the refinance process. The first step is to review the types of refinance to find the option that works best for you. Many types of refinancing options exist, but here are some common ones borrowers consider: After you’ve chosen a refinance type, it’s time to choose a mortgage lender. You don’t have to refinance with your current lender. If you choose a different lender, that new lender pays off your current loan, ending your relationship with your old lender. Don’t be afraid to shop around and compare each lender’s current mortgage interest rates, availability and client satisfaction scores. When you apply to refinance, your lender asks for the same information you gave when you bought the home. They’ll review your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan.1. Choose A Refinance Type
2. Choose A Lender
3. Gather Documents And Apply
Some documents your lender might need include the following:
- Two most recent pay stubs
- Two most recent W-2s
- Two most recent bank statements
Your lender may also need your spouse’s documents if you’re married and in a community property state (regardless of whether your spouse is on the loan). You might be asked for more income documentation if you’re self-employed. It’s a good idea to have your tax returns from the last couple of years handy.
4. Lock In Your Interest Rate
After you get approved, you may be given the option to either lock your interest rate – so it doesn’t change before the loan closes – or float your rate. Each option is unique and has its own pros and cons:
- Rate lock: Rate locks last 15 – 60 days. The rate lock period depends on a few factors like your location, loan type and lender. You may get a better rate by opting to lock for a shorter period because the lender doesn’t have to hedge against the market for as long. Be warned, though: If your loan doesn’t close before the lock period ends, you may need to extend the rate lock, which may cost money.
- Float rate: You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This may allow you to get a lower rate, but it also puts you at risk of getting a higher rate because it fluctuates But if you’re happy with rates at the time you’re applying, it’s generally a good idea to lock your rate.
5. Go Through Underwriting
Once you submit your refinance loan application, your lender begins the underwriting process. During underwriting, your mortgage lender verifies your financial information and makes sure everything you’ve submitted is accurate.
Your lender will verify the details of the property, like when you bought your home. This step includes an appraisal to determine the home’s value. The refinance appraisal is a crucial part of the process because it determines what options are available to you.
If you’re refinancing to take cash out, for example, then the value of your home determines how much money you can get. If you’re trying to lower your mortgage payment, the value could impact whether you have enough home equity to get rid of private mortgage insurance (PMI) or be eligible for a certain loan option.
6. Get A Home Appraisal
Just like when you bought your home, you must get a refinance appraisal before you refinance. Your lender orders the appraisal, the appraiser visits your property, and you receive a professional opinion of your home’s value.
To prepare for the refinance appraisal, you’ll want to make sure your home looks its best. Tidy up and complete any minor repairs to leave a good impression. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.
How you’ll proceed after the appraisal depends on whether:
- The appraisal matches the loan amount: If the home’s value is equal to or higher than the loan amount, it means that the underwriting is complete. Your lender will contact you with details of your closing.
- The appraisal comes back low: If you get a low appraisal, the loan-to-value ratio (LTV) on your refinance could be too high to meet your lender’s requirements. You can choose to decrease the amount of money you want to get through the refinance, or you can cancel your application. Alternatively, you can do a cash-in refinance and bring cash to the table to get the terms under your current deal.
7. Close On Your New Loan
Once underwriting and the home appraisal are complete, it’s time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. It’ll contain all the final numbers for your loan.
The closing for a refinance is faster than the closing for a home purchase. The closing is attended by the people on the loan and title and a representative from the lender or title company.
At closing, you’ll go over the loan details and sign your loan documents. You’ll also pay any closing costs that aren’t rolled into your loan. If your lender owes you money (for example, if you’re doing a cash-out refinance), you’ll receive the funds after closing.
Once you’ve closed on your loan, you have a few days before you’re locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.
