A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that. There are several reasons to consider refinancing your mortgage – to take advantage of low interest rates, get a chunk of cash from your sustained equity, lower monthly payments, or shorten the loan term. While the benefits are clear, the process of refinancing and how it all works can still be quite complicated and confusing. Here’s a behind-the-scenes look at how the refinancing process typically unfolds.
How Does Refinancing a Mortgage Work?
When initially getting a mortgage to buy your home, you must first secure funding from a qualified lender. This involves a somewhat lengthy application, approval, and closing process.
Here’s a quick refresher:
- Shop around for different lenders
- Compare interest rates
- Apply for the loan
- Get an appraisal and home inspection
- Close on the loan and pay the closing costs
Refinancing a loan isn’t much different. What changes (hopefully) are the terms and conditions attached to the loan.
The Qualifications Needed to Refinance a Mortgage Loan
Lenders will take various factors into consideration before approving a refinance loan. Here are some of the qualifications needed to refinance:
- High credit score and stable credit history
- Sufficient equity in the home
- Proven payment history on the existing mortgage
- Verification of income and employment
- Positive debt-to-income ratio
Much of the required criteria is standard across lenders. These qualifications are then used to estimate the risk posed to the lender, influencing the odds of loan approval.
A Closer Look at the Refinancing Process
Now that you have a general idea of how refinancing works, let’s take a deeper look at what the process actually entails.
Find a Lender to Refinance With
You don’t have to go with the same lender you used when first buying the house. In fact, shopping around and researching different lenders can get you a better interest rate in the end. If the interest rate is the main reason you’ve decided to refinance, this will be a big decision. Go ahead and talk to various lenders, comparing rates, availability, and client reviews.
Prepare Documents and Financial Materials
Just as with a traditional mortgage, your lender will require that various documents and financial information be submitted with your refinance loan application.
Here are some things the lender may check:
- Copies of pay stubs and bank statements
- Past W-2s forms and other tax documents
- Credit Report via Experian, TransUnion or Equifax
- Investment and retirement account statements
- Other debt and expense obligations
It’s important to get your finances in order and prepare the necessary documents ahead of contacting the lender. This will help to secure a low interest rate and speed up the process.
Apply for the Loan
Once the lender has thoroughly vetted your creditworthiness, existing debt, and overall financial health, you can formerly apply to refinance. The steps to apply and corresponding timeline will vary based on the lender and financial institution. Once you’re approved, the lender should supply you with a loan estimate form. This document will outline the terms of the loan, interest rate, and an approximate calculation of what you’ll pay at closing.
Once you have gone through the preliminary approval process, the loan will enter into the underwriting stage. Your documentation will not only be reviewed but verified. This can take anywhere from 1-2 weeks before receiving confirmation.
You will need to get the home appraised before refinancing. An appraisal will estimate the property’s current market value. If the appraisal comes back lower than the amount you want to refinance it for, the lender will most likely reject the loan.
Finally, there will be a set closing date for the loan. On a traditional mortgage, real estate agents and the respective sellers are present. Since you already own the home, it’ll just be you and the lender. This is your opportunity to ask any outstanding questions regarding the loan and its terms. Once the contract has been reviewed, you will be required to pay the closing costs (unless they were rolled into the loan). Finally, you’ll sign approximately a million and one documents, and the loan will be deemed officially official.