How to Refinance Your Mortgage

The mortgage refinancing process may be more straightforward than when you initially took out a loan to buy your home, but there are still a number of factors you should consider before applying. Here’s everything you need to know about how mortgage refinancing works, from comparing interest rates to closing on your new loan.

[Read: Best Mortgage Refinance Lenders.]

First, Set a Refinancing Goal

One of the most common reasons to refinance a mortgage is to change the repayment terms, such as interest rate or loan length. This is called a rate-and-term refinance. By lowering your mortgage rate, you may be able to reduce your monthly payments and save money on interest charges over the life of the loan. And shortening your repayment period — for example, going from a 30-year loan term to a 15-year loan term — can help you pay off your home loan faster.

Additionally, a rate-and-term refinance can help you switch from an adjustable-rate mortgage, or ARM, to a fixed-rate mortgage. You might also consider refinancing to get rid of the mortgage insurance premium on a Federal Housing Administration loan once you’ve gained 20% equity in your home or to add a co-borrower such as a spouse.

Another option is a cash-out mortgage refinance, which allows you to tap into your home’s equity by taking out a mortgage loan that’s worth more than what you currently owe on your home. You receive the difference in a lump-sum payout after closing, which you can use as you see fit.

Before refinancing, ask yourself these questions to help shape your strategy:

What are your current repayment terms? You’ll need to know the details of your existing mortgage, including the interest rate, remaining loan balance and monthly payments. That way, you can determine your desired repayment terms based on your existing loan.

What credit score is needed to refinance? A good rule of thumb is to have a credit score of at least 620 to meet the eligibility requirements for mortgage refinancing. Additionally, you should maintain a debt-to-income ratio of 43% or lower to be considered by qualified lenders, the Consumer Financial Protection Bureau says.

How much equity do you need to refinance? You’ll generally need at least 20% equity in your home to refinance without paying private mortgage insurance. Still, you may be able to get a lower rate without that much equity, so it’s important to compare offers from lenders.

How much does it cost to refinance a mortgage? Similarly to when you purchased your home, you’ll pay closing costs when you refinance. Mortgage refinancing closing costs are about 2% to 5% of the total loan amount, which includes the loan application fee, appraisal fee and title search fee, as well as other expenses. The average closing costs for mortgage refinancing are approximately $5,000, according to Freddie Mac.

Shop Around to Compare Mortgage Rates and Terms

Most lenders let you see your estimated mortgage refinance rate through a process known as preapproval, which doesn’t require a firm commitment on your end.

Get preapproved through at least three lenders to find the most competitive repayment terms for your financial situation. You should also get a rate quote from your current mortgage lender, so you can see if it will match or beat your other offers. Freddie Mac research shows that comparing offers from multiple lenders could save you upwards of $3,000 over the duration of the loan.

It’s important to note that getting a mortgage preapproval results in a hard credit inquiry, which will impact your credit score. You should aim to complete all your preapprovals within a 14-day period to minimize the impact to your credit score, since multiple inquiries made during this window count as a single inquiry.

[How to Shop for a Lower Mortgage Rate]

What to Look for When Choosing a Lender

With multiple loan estimates in hand, you’re ready to compare your options. If you’re looking for the cheapest option in the long run, it’s important to consider the annual percentage rate, or APR, instead of just the interest rate. The APR is an annualized measure of the total cost of the loan, which includes interest, discount points, closing costs and other loan fees. And if you’re looking for the lowest possible monthly payment, be sure to read the loan agreement to see how this option would impact your long-term interest costs.

Since you’ll be partnered with your new mortgage lender for up to 30 years, you may also want to compare lender reviews. Keep an eye on customer satisfaction, outstanding complaints and ease of application.

Formally Apply Through the Lender of Your Choice

Once you’ve chosen a loan offer, you’ll begin the mortgage refinancing application. This process takes between 30 and 45 days from start to finish, although the timeline may vary based on the loan type.

Mortgage lenders need to get a clear picture of your financial situation to ensure you can repay the loan. You’ll be expected to provide identification and proof of income with pay stubs, bank statements and W-2s.

At this point, you’ll be given the chance to lock in your mortgage rate. Rate lock periods typically last from 15 to 60 days or more, with longer rate locks being more expensive. You may also opt to pay for a rate lock extension if your loan is taking longer to close than expected.

Alternatively, some lenders may let you bypass the rate lock, or “float” your rate. And in some cases, you may be offered a float-down option, which gives you the ability to lower your rate if the market rate drops during closing.

[Read: Best Mortgage Lenders]

Getting Your Home Ready for the Appraisal

Just like during the homebuying process, you’ll need to have your home appraised when you refinance. A home appraisal gives you — and your lender — an estimate of your property’s value, which will be compared with your loan amount. As an exception, certain types of government-backed loans (including FHA loans and mortgages from the Department of Veterans Affairs) may offer a streamline refinance option, which allows the borrower to bypass the home appraisal requirement.

Before the appraiser visits your property, make a list of any upgrades you’ve made while you’ve owned the home. You may also want to complete any outstanding home repairs that would otherwise lower the value of your property.

If your home appraises at or above the loan amount, then your lender will continue the underwriting process. But if the appraised value comes in lower, you may need to reduce the loan amount or dispute the appraisal report through your lender.

Close on Your New Mortgage

During the closing process, you (and everyone else on the loan) will meet with a representative from your title company or the lender. You’ll go over the closing disclosure, which details the final numbers like your interest rate and monthly payment, and sign the loan documents. Certain mortgage lenders may offer online closing, or e-closing, which allows you to complete the process without visiting a physical office.

The mortgage refinancing lender will then use the funds to repay your previous lender, which means you’ll be responsible only for your new loan. If you’re doing a cash-out refinance, then the difference between your loan funds will be issued to you after closing.

[Compare: Compare Current Mortgage Rates]

When Should You Decide to Refinance Your Mortgage?

You can qualify for a lower mortgage rate than you’re currently paying. One of the greatest advantages of refinancing is the cost savings, since you’re aiming to lower your mortgage rate. But if you already locked in a record-low rate during 2020 or 2021, then current mortgage rates may not be favorable enough to justify a refinance.

You plan to remain in your home long enough to offset closing costs. Because closing costs for mortgage refinancing can be up to 5% of the total loan amount, you’ll want to make sure you’re still saving money over the life of the loan. If you plan to sell your house in just a few years, the interest savings may not outweigh the closing costs.

You want to tap into your home’s equity to meet another financial goal. Cash-out mortgage refinancing can be an effective way to finance home repairs, pay off credit card debt or cover college expenses, especially if you’re sitting on a mountain of equity. But be careful not to borrow more than you can repay, as this can drive up your mortgage payments and overall interest charges.

You can afford to pay off your mortgage faster. Shortening your repayment period from 30 years to 15 years can help you get a lower mortgage rate and save you money over time. However, this will typically result in higher monthly payments. You can use a mortgage refinance calculator to make sure you can afford your new payments.

You want to switch to a fixed-rate mortgage. If you have an adjustable-rate mortgage, you might consider refinancing to a fixed-rate mortgage before the interest rate adjusts. Doing so can protect you from the uncertainty of higher rates (and monthly payments) while you repay the loan.

[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]

More from U.S. News

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How to Refinance Your Mortgage originally appeared on usnews.com

Update 01/17/25: The story was previously published at an earlier date and has been updated with new information.

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