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Wondering how to refinance mortgage loans? Refinancing means taking out a new mortgage to pay an existing home loan. But there's a little more involved than just applying with mortgage lenders. Mortgage refinance definition
A mortgage refinance involves taking out a new mortgage and using the proceeds from it to pay off your existing home loan. Generally, the purpose is to reduce your mortgage interest rate. However, you may also refinance to change other loan terms, such as the repayment timeline or to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
How does refinancing your mortgage work?
Refinancing involves applying for a new mortgage with either your current lender or a different one.
You'll need to have your home appraised and qualify for your refinance loan based on your home's value, your income and credit score, and other financial credentials. Once approved, your new loan will be used to pay off your current mortgage. You'll then make your monthly payment to your new lender.
Read more about how to refinance your mortgage in our guide.
When and why to refinance
It makes sense to refinance a mortgage if:
- You can reduce the interest rate on your current loan: Today's refinancing rates are near record lows, so many borrowers find it's a good time.
- You want to tap into your home's equity: This type of refinance is called a cash-out refinance. You borrow more than your remaining mortgage balance and can use the extra funds to finance home renovations or other needs.
- You need to change the terms of your current loan: One example is switching from an ARM to a fixed-rate loan or altering your repayment schedule.
A mortgage refinance has closing costs, so make sure paying them is worth it. If closing costs are $5,000 and refinancing saves you $150 on your monthly payment, it would take 2.8 years to break even. If you're planning to move before then, refinancing likely wouldn't make sense.
For more on why you should refinance, check out our guide.
How to refinance your mortgage, step by step
Here's how to refinance your mortgage:
- Rate shop for a new lender. Most of the best mortgage refinance lenders allow you to get pre-approved and compare rates without it affecting your credit.
- Apply for a loan. Your refinance lender will want an appraisal to ensure your loan-to-value ratio isn't too high. They'll also check your credit score, income, and debt.
- Schedule closing. After loan approval, you'll close on your refinance loan. You'll pay closing costs out of pocket or they'll be rolled into your new loan.
- Your new lender will repay your old loan. Then, you'll start paying your new lender.
For a more complete guide on refinancing, we compiled our expert's recommendations in The Truth About Refinancing.
FAQs
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To refinance your mortgage:
- Shop around for a refinance loan at an affordable interest rate. Get quotes from several lenders to get the best rate and terms and use a mortgage refinance calculator to compare options.
- Apply for a loan with the lender with the most competitive offer.
- Qualify to borrow based on your home's appraised value, your credit, income, and other financial factors.
- Pay closing costs.
- Close on your loan, at which time your refinance lender will pay off your existing mortgage.
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It's a good idea to refinance your mortgage if you can reduce your interest costs and the amount you save will cover your closing costs before you plan to sell the property.
The standard rule of thumb is that it makes sense to refinance if you can drop your rate by around 1%. Sometimes refinancing is smart even with a smaller rate drop, depending on factors like closing fees and future plans.
You may also want to refinance if you can't afford your current monthly payment. You might be able to switch to a loan with a lower interest rate or longer repayment timeline that works with your budget. And some homeowners take a cash-out refinance to tap into the equity in their home.
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You can generally refinance your mortgage with any lender you want. If your original lender offers the best rate and terms, secure your refinance loan from them. Otherwise, shop around and choose the mortgage lender offering the most affordable loan.
About the Author
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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