What exactly is mortgage refinancing?

When you refinance your mortgage, you replace the home loan you got when you originally bought your house with a new one. People usually refinance their home because they need extra money, want to save money on interest in the long run, or both.

What happens when I refinance my loan?

Usually, people can negotiate a lower monthly payment when they refinance their mortgage, but you should still be sure to consider the terms of your refinancing carefully before signing a new loan agreement.

Instead of going to the home seller the way your original loan did, a refinanced mortgage pays off the balance of the old home loan. You’ll need to qualify for the new loan just as you did for your mortgage. You’ll also need to go through the application and underwriting process.

7 Simple steps to refinance your home loan

At the time of this writing, rates have been at historic lows for almost a year. Which means many homeowners have made the move to refinance their homes.

Homeowners who've refinanced in 2020 will find some technological updates in the process—like digital signing and automated employment verification—but the steps you’ll follow are still largely the same.

1. Set your goal

Before you determine the details like the rate you want, it's best to bring it back to basics. Why are you considering a home loan refinance? Are you looking to get a lower rate? Would you like to pay off your loan faster? Do you need extra money? Your answers to these questions will help you communicate with your loan advisor.

2. Find a lower rate

Take your time choosing a lender. Visit websites. Read reviews. Check out rates. Here at Lower, we have everything you need to decide on our website—even a comparison of our current rates with the rates of other top lenders updated daily. Comparing rates and reviews will help you get the best deal, and also find a lender you’ll enjoy working with.

Check out our 6,000+ five-star reviews on Google, Zillow, LendingTree, and Facebook to see what others are saying about working with Lower.

3. Communicate and document thoroughly

The faster you respond to requests for things like documents, the faster your loan will close. Make sure you’re communicating with your loan team regularly. They'll most likely end up asking for a few documents that weren't included with your original application. This is completely normal, and just a part of the process.

Also, make sure to check your email often so you don’t miss any messages about your loan. You don’t want your application to get held up because an email went to your spam folder or you forgot to check your voicemail. The faster you respond with documentation, the faster you can be approved and funded. Being responsive means you’ll move ahead in the process more quickly than the people that lag behind.

The types of documentation you'll need depends completely on your situation. Beyond the basics, if you have circumstances like gaps in income (parental leave or a layoff, for example) those will require extra documentation. You may be asked for evidence like hospital bills, notes from your employer, or anything else that can explain your situation. If you’re in an unconventional career circumstance like freelance employment, you'll likely be asked to show evidence of your different sources of income, and how that income is reliable.

Gather documentation for the appraiser coming to view the house as well. Include features of the house and surrounding area that might affect property value. If you remodeled, include before and after photos and receipts to document any money you put into the property.

4. Be careful with your credit

It can be tempting to start spending more knowing you're going to be saving money after your refinance. But you'll want to hold off on making any major financial decisions (or purchases) until your loan closes. You don’t want anything messing up your credit score and affecting your rate or your qualification.

During the process, your credit will be checked multiple times. If new debt shows up, or there are multiple new credit inquiries on your record, you’re going to get some questions. And that slows everything down. If you do need to make a big purchase, just run it past your loan advisor first so they can get ahead of it.

5. Lock in your rate

Once you’re in the refinancing process, you’ll want to make sure your rate is locked—meaning when the market shifts, your rate will stay the same. Lock periods can last for 30 days, 60 days, or longer as needed.

The lock period usually starts after your appraisal (but can also be locked later) and goes all the way through closing. However, there are certain circumstances that can void that rate lock. If any information on your application changes—like your credit score or the appraisal—it can void the lock. Any changes to the loan itself can also void the lock. When filling out your application or providing information to your loan advisor, it's best to give them the most accurate, thorough, up-to-date information possible.

Locking in your rate is a great tool, but it doesn’t mean you should wait as long as possible hoping for the lowest possible rate. Yes, there is a chance rates could go lower, but there is also a chance they could go higher. Generally, if you can get a good rate with monthly payments you can afford, lock it in.

6. Understand the loan process

Any time there is a heavy volume of refinancing, understand that the time between application and closing might be longer than you expected.

If your loan takes longer than the initial lock period you agreed on, it’s possible to get an extension. If you need to do this, you can usually do so without being charged an extra fee. Get the extension agreement in writing and ask about any associated fees. (They'll also be outlined in your Loan Disclosure document.)

7. Prepare to close on the loan

Closing on a refinance is similar to the process you had with your original home loan. You’ll still pay the closing costs and any other fees required, but with a refinance, those are usually rolled into your full loan amount. You can also pay them out of pocket if you choose. (Just ask your loan advisor.)

If you have any remaining questions about your loan, now is the time to get them answered. Be sure you fully understand everything you sign.

The time from signed contract to loan closing is usually 30 to 60 days. During that period you’ll:

• Finalize the contract. It’s required by law that you get an estimate detailing the terms and costs of your loan within three days of signing.
• Confirm that an appraisal has been ordered.
• Get an appraisal of your home.
• Follow up on anything uncovered by the appraiser.
• Set the closing date.
• Read the closing disclosure before the closing date, and make note of any questions you have.
• Pay closing costs and fees (if you’re paying them out of pocket).
• Complete and sign all associated paperwork.

There are a few closing costs specific to refinancing that can add up. Your loan advisor will let you know about any fees that are added to your loan, but you can also ask. Here are some of the most common:

• Early repayment fees. Make sure you know whether your mortgage includes a prepayment fee and whether refinancing will trigger that fee. Fees for paying off a loan early are illegal in some states, and are generally considered unethical, but it’s always wise to double-check your contract to see if it includes one.
• Discount points. These are interest payments based on your total mortgage loan amount. You may be able to buy points at the time of closing to reduce the overall cost of the loan. In other words, pay now to save later. This could make sense if you plan to stay in your home for a long time.
• Origination fees. It takes a lot of time, energy and people to get your loan from application to closing. There’s a lot going on behind the scenes, and origination fees cover those costs. Appraisal fee. $300 to $500 usually covers the cost of your home appraisal. If you bought the home recently and already have an appraisal on file, you might be able to waive this fee. (Otherwise, an appraisal is most likely required.) Also, if you’ve renovated or done other work on the house to raise its value, it’s probably worth getting it reappraised.
• Mortgage and title insurance fees. Government-backed loans from agencies like the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) require you to buy insurance.

You should be able to compare most of these costs when you get your loan estimate documents. The closing disclosure statement will also detail the costs.

Recap

Refinancing can be an excellent way to save money—either over the short term, the long term, or by accessing the equity you've built up. Knowing your goal will help direct you where to get started.

Whatever your reason for refinancing, it’s worth taking the time and effort to do it right. Being informed will empower you to make better decisions and secure a smooth, equitable process. Home loans definitely don’t have to be scary, so remember to ask questions. The more you know, the better you’ll feel going forward.

Ready to get started? We're Lower.

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