So, you’re thinking about refinancing. Mortgage refinancing is an option for many homeowners and can provide a variety of benefits. Maybe you’re hoping to get a better interest rate – or get rid of Private Mortgage Insurance (PMI). Or maybe you want to switch from an adjustable-rate mortgage to a fixed-rate mortgage – or lower your payback term to 15 years, instead of 30. Or maybe you just really, really want your our ex-spouse's name off your mortgage. But can you afford it, and is it the right financial choice to make?
In this article, we’ll walk you through the ins and outs of mortgage refinancing including how to refinance, mortgage hang-ups, and more. We’ll also answer some of your top questions, like, What does refinancing a house mean, How does refinancing a mortgage work, How much does it cost to refinance a mortgage, How soon can you refinance a mortgage, and when to refinance. Mortgage woes don’t have to get you down – read on to get the support and help you need.
What is mortgage refinancing?
So, what is refinancing and what does it mean to refinance? “Home loan” is probably a term you’re familiar with – it’s an amount of money you owe to a bank or financial institution that is used to purchase a house or property.
It’s a common misconception that the home refinance process is a renewal of your current loan – that you “start over” on your payments in exchange for the money you’ve already paid on your house. That’s actually not what the process is.
Mortgage refinancing – also known as a mortgage refi or a home refi – is, essentially, replacing your current home loan with an entirely new one, including a new interest rate.
Refinancing can also be an option to remove someone from your mortgage if, say, you’ve gotten divorced or become separated from a partner after purchasing a home together.
Example of a home loan refinance
Let’s say that Shakeisha, a homeowner, purchased her home in 2019 for $250,000 with a 30-year fixed rate mortgage at a 12% interest rate. Since then, her home’s value has increased and she’s built up additional equity by making extra principle payments. Her income has also increased over the years since she purchased the home and interest rates for mortgages are much lower than when she first purchased her home. She would like to change her mortgage to a 15-year term. By refinancing her home from a 30 year to a 15 year mortgage, she’ll have her house paid off more quickly and, with a lower interest rate, she will pay much less in interest over the term of the loan. For her, it’s a win-win.
Now that you’ve seen an example, let’s get into how refinancing a mortgage works, what is the purpose of refinancing a home, the pros and cons of refinancing mortgage, and the refinance mortgage process.
When to refinance a mortgage
If you want to save money on interest – Either by switching to a shorter loan term or by lowering your loan’s interest rate.
If you need to add or remove someone from a mortgage – In the case of a marriage or divorce.
If you want to consolidate debt – Refinancing your home can be a good way to pay off higher interest debts, like student loans or credit cards, and consolidate those payments into a single monthly amount with a lower interest rate.
Get a lump sum of cash – Refinancing can be a good way to get a large lump sum of cash that you can put towards covering tuition, paying for repairs, or covering other large-ticket items. This is called a cash-out-refinance, and typically you have to have quite a bit of equity in your home to pursue this option. It can also carry a higher interest rate than a typical refinance.
How does refinancing a mortgage work?
So, can you refinance with same lender? Can you refinance with a different lender? Can you refinance a fixed rate mortgage? Can you refinance an adjustable-rate mortgage? How easy is it to refinance a mortgage? And how does home refinancing work?
As we mentioned in the previous section, refinancing your home means you are replacing your current loan with an entirely new one. That new loan is then used, in part, to pay off your old mortgage. . This means that when you refinance you can select an entirely new lender, if you’d like. You may even be able to change the type of home loan, if you’d like – say, if you wanted to switch from an adjustable-rate mortgage to a fixed-rate.
If you’re refinancing, you’ve likely already been through the homebuying process – so refinancing your home will feel familiar, as it follows a similar path:
Check your credit score – As with any loan, you’ll want to make sure your credit score is up to snuff, as this can help determine the type of loan you are able to secure as well as the loan terms.
Apply – Fill out a refinance application with a lender. Unlike purchasing a home, you don’t need to get pre-qualified, since you presumably won’t be house hunting.
Appraisal – Once you’ve selected your loan terms and locked in your interest rate, your home will need to be re-appraised. This will help determine the current value of your home, which will affect your final refi amount. As with purchasing a home, your lender will arrange for an appraiser to come out and evaluate your property.
Closing – Close on your new refinance. As with a purchase, you’ll meet to sign your new refinance documents, and you should be prepared to pay any closing costs that haven’t been rolled into the refi.
Collect your funds – If you are completing a cash out refinance, funds will become available to you a few days after closing. Typically, the time between closing and when funds are deposited in your account is a grace period, in which you can back out of the refi should any unexpected situations arise.
How long does mortgage refinancing take?
Like a mortgage, the average time to refinance a mortgage may be a little bit longer than other loans, as it is subject to underwriting and appraisal processes. While the time will vary based on your lender and your personal situation, you should anticipate one to two months for the process to be complete.
Average cost of a mortgage refinance
The cost of refinancing a mortgage will vary from person to person and is dependent on your personal finances and situation. You should expect to pay closing costs – which will vary but are based on a number of factors like who you chose as your lender. You should expect, however, to pay somewhere between 3-6% of your total loan amount.
Calculate your mortgage refinance
Use our mortgage refinance calculator to determine if refinancing can help you prosper.
When not to refinance a mortgage
There are some situations where refinancing may not be the best choice for you. Some of these might be:
You don’t have money saved up – If you don’t have enough cash on hand to cover closing costs, you may want to rethink refinancing.
You have bad credit – If your credit score isn’t up to snuff, refinancing likely won’t improve your situation, and you may not be able to secure better loan terms than your current mortgage loan.
You don’t have enough equity – In order to be eligible to refinance, you need to have a certain amount of equity in your home. If you recently purchased your house, haven’t paid much on it, or didn’t make a 10-20% down payment, you may not qualify.
Explore your options with our mortgage advisors
Want to see if you qualify? Explore your options with our attentive mortgage advisors.
Mortgage refinancing FAQs
How soon can you refinance a mortgage?
In some cases, depending on the loan type and your personal situation, you may be able to qualify for a refinance right away. In other scenarios, like a cash-out refinance, you may have to wait several months after closing to refinance.
Can I lower my monthly payment without refinancing?
You can, technically, but your options are severely limited – and most of them require you to be experiencing financial hardship. If you meet that qualification, you may be eligible for a mortgage modification or mortgage rate reduction, which can either lower your monthly payment or adjust the terms of your loan to be more manageable during a difficult time.
Will refinancing my home affect my credit?
Yes. A refinance is a major loan, which means the underwriting team managing your refi will pull a full credit report. This could affect your credit score by a few points.
Can I refinance a mortgage with bad credit?
Pursuing a refinance when you have bad credit may not be a good idea – though everyone’s situation is different, and we encourage you to chat with a mortgage advisor about your specific circumstances. Often, however, your credit score will help determine how favorable your loan terms are – and if you even qualify for one. If your credit score is poor, your refi terms may not provide any improvement over your current mortgage.