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Complete checklist of mortgage refinance requirements

Everything you need to know when you refinance your mortgage

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Refinancing a mortgage is a popular way to reduce your payments, withdraw cash from your equity or do both, depending on how low interest rates are. But you need to be aware of mortgage refinancing requirements in order to secure the best interest rate and terms for your new loan.

Learn about the mortgage refinance process, types of refinancing options available and what you need to qualify.


Key insights:

  • A mortgage refinance can lower your interest charges and monthly payments.
  • Refinancing a home can be time-consuming and expensive, so make sure the savings offset the costs and effort.
  • Be wary of resetting your loan term and increasing your overall mortgage costs.

What is a mortgage refinance?

A mortgage refinance is the act of replacing your current mortgage with a new loan with a different balance, interest rate, payment amount or other terms. Refinancing your mortgage is a popular way to take advantage of changing interest rates, access your home's equity or lower your monthly payment.

Types of mortgage refinancing

When it comes to refinancing your home, there are many different types of mortgage refinancing options based on your goals.

  • Rate/term mortgage refinance: This refinance option changes the interest rate, term or both of your mortgage. Typically, borrowers refinance to lower their interest rate or shorten the term. For example, refinancing from a 30-year mortgage at 5% to a 15-year mortgage at 3%.
  • Cash-out refinance: You can refinance your home loan to withdraw cash from your home equity and repay the balance over time.
  • Cash-in refinance: When you pay a lump sum toward your mortgage, it doesn't change the monthly payment. A cash-in refinance reduces your mortgage balance and lowers your payment by refinancing the loan.
  • Streamline refinance: Borrowers can "streamline refinance" government-backed loans from the FHA, VA or USDA without much of the standard time and expense of a traditional refinance.
  • No-closing-cost refinance: With this type of refinance, you don’t incur any out-of-pocket costs. The closing costs are rolled into the loan balance or are covered by paying a higher interest rate on the mortgage.
  • Reverse mortgage: Eligible seniors can withdraw equity from their homes without owing monthly payments. Instead, interest charges are added to the loan balance, and the loan must be repaid when the borrower sells the home, moves out or dies.
  • Short refinance: This type of mortgage is offered by banks that want to avoid a foreclosure or a short sale with a borrower who is in default. The borrower receives a new mortgage with a lower balance and payment based on what they can realistically afford.
  • Change-of-product refinance: This is when a borrower refinances into a different product type to receive certain benefits. For example, a borrower might refinance out of an FHA loan into a conventional mortgage to eliminate mortgage insurance premiums.

When should you refinance your mortgage?

There are numerous situations where a homeowner should consider refinancing their mortgage. Here are a few of the most common:

  • Tap into equity
  • Get a lower interest rate
  • Shorten or lengthen the mortgage’s term length
  • Eliminate mortgage insurance
  • Convert to a fixed rate
  • Lower monthly payment
  • Remove a co-signer from an existing loan

Pros and cons of mortgage refinancing

There are positives and negatives that homeowners need to be aware of when considering a mortgage refinance.

You don't want to rush into a decision, but remember that interest rates change regularly, so if rates are low, don't wait too long. In some cases, rate changes can be significant enough that a refinance is no longer a good choice when you finally make up your mind.

Pros

  • Improve the rate and term of your loan. When you refinance, you can lower your interest rate, get better terms and lower your monthly payment.
  • Access money at a lower interest rate. Withdrawing equity from your home often comes with a cheaper interest rate than other forms of borrowing, such as an unsecured loan or a credit card.
  • Pay off your loan faster. By reducing your interest rate or shortening the term of the loan, you can pay off the loan faster and save money on interest over the life of the loan.

Cons

  • Savings might not be worth the effort. Refinancing a mortgage can be expensive and time-consuming, to the point where the monthly savings might not be worth the time and expense of getting a new loan.
  • Your loan term resets. If you refinance your current loan into another 30-year loan, you could end up paying more overall, even if your monthly payment decreases.
  • You possibly squander your home equity. By pulling cash out, you could waste your home equity on frivolous purchases, like a new car, a vacation or shopping sprees.

What do I need to qualify for a refinance?

To qualify for a mortgage refinance, you must meet basic requirements. These can vary slightly from lender to lender, but they generally include the following:

  • Solid credit score: Your credit score illustrates your ability to handle debt, and most lenders require a minimum credit score to approve an application. Generally, the higher your credit score, the more likely you are to qualify for the best interest rates and terms.
  • Good debt-to-income (DTI) ratio: Before a lender approves your application, it wants to make sure your income can cover all of your debt payments. Paying off loans or bolstering your income can lower your DTI ratio and improve your chances of qualifying for the best mortgage products.
  • Verifiable income: Lenders need to verify your income through documentation (e.g., tax returns, pay stubs) and by contacting your employer. This provides assurances of ongoing income to pay your monthly bills.
  • Home equity: In most cases, you receive better rates and terms when your loan-to-value (LTV) ratio, a measure of your home equity, decreases.

Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage," recommends an initial consultation with a mortgage broker when considering a mortgage refinance.

"They'll assess your current finances and credit score to see what steps you can take to qualify for the best mortgage rates and terms for your situation,” Fleming said.

Steps to take to refinance your mortgage

While every lender has its own criteria, most banks follow a similar process when refinancing a mortgage.

Be prepared to follow these steps for your own mortgage refinance:

  1. Check your credit score. The lender will access your credit report and check your credit score. It’s a good idea to check your credit report and score ahead of time  — both to review the accuracy of the information and so you have expectations in line with your credit profile.
  2. Shop for rates with multiple lenders. It is wise to get quotes from different lenders to find the best rates, fees and loan terms. Multiple mortgage credit inquiries within 45 days are recorded as a single inquiry, according to the Consumer Financial Protection Bureau.
  3. Choose a lender, apply and lock your rate in. Once you've found the lender with the best rates, fees and loan terms for your borrowing needs, complete your application and lock in your interest rate.
  4. Prepare to close. The loan process for a refinance is virtually identical to the process of getting your original mortgage. You'll need to provide paycheck stubs, tax returns, bank statements and other documents for the lender to verify your income and complete the underwriting process.
  5. Close your refinance. When the lender is finished underwriting the loan, you'll attend a loan signing. The documents are signed before a notary, so remember to bring your photo ID. You may be required to bring a certified check to the closing or wire money to cover your closing costs or reduction in the loan amount.

Risks to consider when refinancing

You might think that refinancing your mortgage is a no-brainer, given all the possible benefits. While it can make sense for many homeowners, consider these risks before submitting your application:

  • New closing costs and fees: Getting a new loan means you’ll likely have closing costs and fees. These additional costs can eat up some of the savings from lowering your interest rate.
  • Creating a longer break-even point on the mortgage: When you start over with a new mortgage, it can take longer to break even on the closing costs and fees. Ask yourself if you'll live in the home long enough to justify a new loan.
  • Underwater loans from taking out too much money: If you take out too much of your equity, you are at risk of your loan being more than the home is worth if there's a decline in value.
  • Prepayment penalties: Some new mortgages charge prepayment penalties if you refinance or pay off the loan too quickly. Your current loan may charge a prepayment penalty, so factor in these costs when evaluating your refinancing options.
  • Lower rates might carry higher fees: When comparing lenders, watch out for loans that offer low interest rates but charge higher fees.

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    FAQ

    How much equity can I cash out?

    The amount of equity you can cash out of your home depends on the lender, which mortgage product you are applying for and how much equity you have. You are also limited based on your income, credit score and DTI ratio.

    Will refinancing my mortgage hurt my credit score?

    Getting a new mortgage involves at least one hard credit inquiry and a new account, both of which can affect your credit score. Overall, the impact should be minimal for people with established credit. Combined, these two factors only affect 25% of your FICO score.

    Does refinancing mean starting my mortgage over?

    Refinancing your mortgage means getting a new mortgage, so you are effectively starting over. For borrowers who are many years into their current mortgage, consider refinancing into a shorter term, like 10, 15 or 20 years, to stay on schedule with your original mortgage payoff date.

    Will refinancing my mortgage save money?

    Refinancing your mortgage can save you money by lowering your monthly payment or reducing the total interest paid over the life of the loan. The best approach to saving money is to reduce your interest rate and shorten the loan term. If you extend the term of your loan, you may pay more in total interest, even with a lower interest rate. When calculating savings, don’t forget to include the closing costs and fees.

    Bottom line

    Refinancing a mortgage can be a smart choice for homeowners. Getting a new loan can lower your monthly payment, reduce your interest charges or shorten your repayment period. Additionally, you may be able to withdraw cash from your home's equity. The mortgage refinancing requirements vary by lender, but most lenders are concerned with verifying your ability to repay the loan and home equity.

    A mortgage refinance may seem like a wise choice, but consider the risks and costs before you proceed. Shop around at different lenders to learn what loan products are available and how much they cost, and check reviews related to customer service.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
    1. FICO, "What's in my FICO Scores?" Accessed Dec. 8, 2022.
    2. Consumer Financial Protection Bureau, “What exactly happens when a mortgage lender checks my credit?” Accessed Dec. 26, 2022.
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