Finances

How to refinance your mortgage: a simple guide to refinancing

Refinancing your mortgage can save you money, but doing your research first is important. This simple guide will show you how to refinance your mortgage and get the best deal possible.

Advertisement

What you need to know before refinancing your mortgage

Refinance symbol. Wooden cubes with word 'refinance'. Yellow light bulb. Beautiful orange background. Business and refinance concept. Copy space.
Read on and learn how mortgage refinancing works. Source: Adobe Stock

Are you looking for a way to reduce your monthly mortgage payments and save money on interest? Then refinancing your mortgage could be the solution.

Business concept meaning Mortgage Closing Costs with phrase on the piece of paper.

What are mortgage closing costs?

Are you wondering what closing costs are? Wonder no more! Keep reading and learn how they work and how they impact your home-buying process.

By understanding how it works and exploring potential options, you can enjoy flexibility, not to mention peace of mind. Keep reading to learn more about mortgage refinancing.

What does it mean to refinance a mortgage?

You’ve likely heard the term “mortgage refinance” bandied about before, but you may not be quite sure what it really means. Know that it can surely help you save your hard-earned money.

Simply put, when you’re refinancing a mortgage, you’re trading a home loan you already have for a new one.

The new mortgage taken is destined to pay off your old loan balance.

By refinancing, borrowers can apply for a new principal and better interest rates and repayment terms.

Thus, they can turn a variable rate into a fixed one.

The mortgage refinancing process is easier than the home-buying process itself. It usually takes 30 to 45 days to complete the process.

Documentation

Borrowers must meet the eligibility requirements to qualify for mortgage refinancing.

This way, lenders will ensure borrowers are financially able to pay back the loan.

The requirements might change from lender to lender. Nevertheless, there are some general documents requested:

  • 2 most recent bank statements;
  • 2 most recent W-2s;
  • 2 most recent pay stubs.

You might also have to provide some additional documentation if you’re self-employed. So remember to check the lender’s requirements before applying.

When should you refinance your mortgage?

Blonde caucasian woman working at the office at night thinking concentrated about doubt with finger on chin and looking up wondering
Find out when you should refinance your mortgage. Source: Adobe Stock

Before starting your mortgage refinancing process, you must consider why you want to do it. Also, refinancing at the right time is key.

For example, mortgage refinancing is an excellent way to reduce your monthly payment.

It allows you to pay less interest throughout the life of the loan.

You should also consider refinancing if you want to repay your loan faster. Thus, you can refinance 30-year terms into a 15-year term loan.

Also, if you want to access your home’s equity, you should refinance. With a cash-out refinance, you can borrow more than you owe on your current loan and get the difference.

Do you want to get rid of FHA mortgage insurance? Then refinancing is the option. It also allows you to turn an adjustable rate into a fixed-rate loan.

How to refinance your mortgage in 5 easy steps

As said, refinancing your mortgage can be a great way to save money and make home ownership more affordable. And I know that the whole process can seem daunting.

But don’t worry! Now that you know what it is and how it works, it is time for the five tips on how to refinance your mortgage! Are you ready? Let’s take a look!

1. Start by checking your credit score

Your credit score is a key number of your financial life. It shows lenders how responsible you are for your debts and how likely you are to pay them back.

Recently, lenders have set stricter standards for loan approval. So if you want to guarantee your qualification for lower interest rates and fees, ensure you have a higher score.

With 760 or higher, you can increase your chances of qualifying for better loan conditions. So if your score is not that good, take your time to improve it.

real estate agent Delivering sample homes to customers, mortgage

What is mortgage insurance?

Get a clear understanding of what is mortgage insurance, its pros and cons, and how to decide if it's the right choice for you.

2. Set your main goal

What is your main goal when refinancing a mortgage? Do you want lower rates? A shorter loan term? Tap into your equity?

Well, you must have a clear goal before deciding what types of refinancing you want to apply for. This way, you can work toward a clear objective.

3. Shop for the best rates

Don’t apply for the first lender you see. The key to saving money is comparing multiple options before deciding.

After all, one of the main benefits of refinancing your mortgage is getting lower rates.

So remember to shop around and check every important detail.

Remember to analyze rates and fees, which can add to your costs.

4. Know your debt-to-income ratio

Your debt-to-income ratio, or DTI, is also important in the refinancing application process.

Lenders mostly like seeing a maximum DTI of no more than 28%.

Still, you might qualify for refinancing with no more than up to 43%. As with other requirements, this might vary from lender to lender.

5. Organize your paperwork

Excited asian female feeling euphoric celebrating online win success achievement result, young woman happy about good email news, motivated by great offer or new opportunity, passed exam, got a job
Is refinancing your mortgage the best option for you? Read on and find out! Source: Adobe Stock

As previously said, lenders will request documentation to check your financial background. The requirements might change from lender to lender.

So remember to have these documents in your hands when applying for mortgage refinancing.

Gather federal tax returns, pay stubs, and more. The lender will also check your credit and ask you to disclose your assets and liabilities in advance.

Is refinancing your mortgage the best option for you?

Mortgage refinancing offers multiple benefits for homebuyers. It allows them to get free up money monthly and pay off their mortgage faster.

However, when it comes to deciding if a mortgage refinance is the best option, it is up to you to decide. You must consider your personal and financial needs and your main goal.

Before deciding whether or not to refinance your mortgage, make sure you understand the pros and cons.

Getting started is easy – follow the steps laid out in this guide. And don’t forget to ask for help if needed.

If you want to dive deeper into mortgage refinancing, we’ve got you. Our following article will compare the advantages and disadvantages of refinancing.

Also, we’ll explain the different types of mortgage refinance and how they work. Keep reading to learn more and make a more informed decision. Let’s go!

refinancing words on notebook

What is a mortgage refinance?

A mortgage refinance can save you money, but it's important to understand what it is and how it works. Learn more here.

About the author  /  Luis Felipe Regueira

I needed to learn about finances when I was in culinary school and wanted to save money to start my own business. So I haven't stopped because I believe studying and writing about the topic can help more people achieve their goals. Currently, I write about finances and run a small coffee shop.

Trending Topics

content

Supplemental Nutrition Assistance Program (SNAP): benefits, requirements and more

Learn about Supplemental Nutrition Assistance Program (SNAP). Get assistance to provide for your family. Read on to learn more!

Keep Reading
content

What is a reverse mortgage?

Read on and learn what is a reverse mortgage. Learn how this type of home loan works, who can get it, and if you're eligible.

Keep Reading
content

Apply for the First Savings Credit Card: find out how

Learn everything you need to know about how to apply for the First Savings Credit Card, and get started today!

Keep Reading

You may also like

content

Chase Freedom Unlimited® for you!

Elevate your financial journey with Chase Freedom Unlimited®! Enjoy great credit limits and 1.5% cash back on every purchase. Explore now.

Keep Reading
content

Citi® Diamond Preferred® for Credit Rebuilding!

Experience premium perks with the Citi® Diamond Preferred® credit card. Benefit from an extended 0% introductory APR.

Keep Reading
content

How to apply for Capital One Quicksilver® Cash Rewards?

Simplify your rewards game with the Capital One Quicksilver® card. Earn cash back effortlessly – 1.5% on every purchase.

Keep Reading