How Does Refinancing Your Home Mortgage Loan Work

How Does Refinancing Your Home Mortgage Loan Work?

How Does Refinancing Your Home Mortgage Loan Work?

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As a former licensed realtor and avid real estate investor, I have used mortgage refinancing in both my primary and investment real estate portfolio for years. After going through this process at least a couple of dozen or more times over the past couple of decades and I safely say I have the knowledge and experience to share with you some of the best tips and advice for you to be successful with your home mortgage refinancing process.

What are some of the benefits of refinancing your mortgage?

Mortgage refinancing allows you, the homeowner, to replace an existing mortgage loan with a new mortgage loan. The terms and conditions of the new mortgage loan can be customized to your specific needs; this can include the amount owed, the term of the loan, and the new loan’s mortgage rate. By mortgage refinancing, you can also cancel any mortgage private mortgage insurance (PMI) if you now cross the 20% equity threshold, get access to cash for needed home improvements, and reduce your monthly mortgage payments, among other opportunities. 

How much equity in your home do I need to refinance?

equityIn terms of mortgage refinancing, when a lender refers to the equity in your home, they’re talking about the difference between the value of your home and how much you owe on your mortgage loan. For example, if your home is worth $600,000 and you owe $300,000 on your existing loan, then you have 50% equity. 

Most mortgage lenders will require you to have at least 20% equity in your home before they will even consider offering you mortgage refinancing on a home loan. 

To understand your debt to equity ratio you can start by looking at the current assessed value of your property. This usually provides a pretty conservative estimate to start with. In addition to this, you can get a more accurate bearing on the value of your property by using sites like Zillow or Trulia. 

During this rough estimate process, you should have a good understanding now of what your home could be worth in the open market and you also know what you currently owe on your home. As long as what you owe is less than 80% of the value of the property, then you are probably safe to proceed. I personally like going in with a bit of margin before taking any next steps.

Understand that the only value the lender will take into consideration is the independent appraisal that is conducted as part of the refinancing process.

Is it worth refinancing your mortgage?

  • If you can negotiate a significantly lower mortgage rate, then mortgage refinancing is usually worth considering.
  • Occasionally mortgage interest rates drop significantly. When this happens you should consider mortgage refinancing to reduce your monthly interest payments and the term of your mortgage as well.
  • I only recommend fixed-rate mortgages for refinancing, especially during low-interest rate market periods.
  • As long as you will not end up exacerbating your existing debt problems, merging debt or tapping equity through mortgage refinancing, may be an option worth considering.
  • There are mortgage calculators that can prove very useful tools to help you crunch these figures before you ever decide on mortgage refinancing. Check out our partner’s free loan refinancing calculators to help you in the refinancing decision-making process.

What are your expected refinancing costs?

The prospect of significantly reducing the mortgage rate can prove very tempting to homeowners but it’s important to understand before you ever proceed with mortgage refinancing that there will be some costs associated with the closing of the loan and you should factor them into your overall home mortgage refinancing plan.

On average, you can expect to pay anywhere from 2 to 5% of your loan’s principal in terms of costs at the time of closing. Some lenders do make you pay upfront as well for the mortgage appraisal. This is usually non-refundable, so please be aware of that as well. 

For example, if you’re refinancing a mortgage that’s valued at $200,000 your closing costs could run anything from $5,000 to $10,000.

Closing costs example only, costs will most certainly vary:

  • Attorney/closing fees vary from $500 to $1,000
  • Application fees can cost $100 to $300 or more
  • Underwriting fees vary 0.5%-1.5% of your loan principal
  • Appraisal fees cost $300-$400 or more
  • Credit check fees start at $25 
  • Title services$800-$1000
  • Survey fee$200-$500

What do I need to prepare to refinance my mortgage?

If your mortgage loan has not been backed by the government, they will require you to produce some documentation. The following checklist will help you understand most of the documents required when applying for a mortgage refinancing agreement so that you can properly prepare. What lenders request could vary but the list below is pretty universal.

Recent pay stubs

All mortgage lenders will require proof of consistent income before ever considering mortgage refinancing. Your lender wants to ensure that you have the means to repay your new mortgage agreement and service any of the long-term debts and living expenses you may have.

W-2s and/or 1099s and tax returns

It’s pretty standard for your mortgage lender to ask for at least 2 years’ worth of tax returns that might include your last W-2 or 1099 statements. They use the average of the past two years of income to calculate what you can apply for in regards to a home loan.

A current credit report

Before a lender would approve you for mortgage refinancing, they will perform a standard credit check. Every provider will have a minimum threshold for credit score requirements. It’s always better to ask beforehand to avoid any disappointment when considering refinancing to make sure you’re not wasting your time. Be sure to stay on top of your credit leading up to your refinancing. I use a free service called Credit Karma. See the link below to apply to Credit Karma today for free.

#1 Rated For Free Credit Reports & Credit Scores

Monitoring your credit score on an ongoing basis is part of your ongoing journey to financial wellness. The best company out there for this is Credit Karma. You can access your credit score and credit report anytime you need it. I continue to use Credit Karma to this very day. The best part of all is that it’s free. If you haven’t signed up already go do it today.

credit karma mobile Phone

Be sure not to open up any lines of credit or move large sums of money prior to or during the mortgage refinancing process. It could cause red flags for the lender, jeopardizing the mortgage process.

Statement of any Outstanding Debts

Although your lender could probably see most of your existing debts via any credit report, they will ask you to sign a legal document stating that these are standing debts that are complete to the best of your knowledge.

A full statement of Assets

Nothing has changed since you first took out your mortgage loan your lender will want to verify your ability to repay any out-of-pocket expenses such as mortgage repayments and closing cos

How long does it take to refinance?

According to information provided by Ellie Mae in 2019, it takes on average 35 to 45 days to receive mortgage refinancing approval. 

Waiting a month may seem like a painfully long time with refinancing, but the vast majority of the time is just spent filing paperwork.

Although you may be an obvious candidate for mortgage refinancing, your lender will always have to follow a specific set of steps to ensure everything goes both smoothly and legally. You can set yourself up for success by getting all your paperwork ready what in advance and verifying your credit is in good standing with Credit Karma.

Secure your mortgage home loan refinancing

If you’re looking for a turnkey company that will do all the hard work for you in the home loan search process, then look no further than LendingTree. LendingTree is a financial technology company that is partnered with all the top lenders and provides you a simple-to-use interface where within minutes you can find the loan partner to help you secure the financing for your first home. Check out LendingTree below. 

#1 Rated Home Loan Mortgage & Refinancing Platform

#1 Rated Home Loan Mortgage & Refinancing Platform

If you’re looking to get you the best deal possible on your loans, period. By giving you multiple offers from several lenders in a matter of minutes, they make comparison shopping easy. LendingTree is a leading online loan marketplace with one of the largest networks of lenders in the nation. And we all know-when lenders compete for your business, you win!

LendingTree Hero

For more information on mortgage refinancing, click on the “A Consumer’s Guide to Mortgage Refinancing” from the Federal Reserve.

Summary

It should be noted that mortgage refinancing is not a decision that should be taken likely. Just because other people you know are doing this, it’s not a reason to jump on the bandwagon. Take the time needed to figure out exactly what your costs will be and whether it will be eventually beneficial to you. 

Everyone’s financial situation is unique and refinancing a mortgage is only recommended if one or all of the following is true :

If the current mortgage rates are over 1% lower than the rate, you’re paying right now and the results of the free mortgage calculator amortization table make sense to you financially.

So what are your thoughts on mortgage refinancing? Are you planning on doing it? Have you already done it before? Do you have any thoughts or tips on mortgage refinancing? Please share them in the comments section below.

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Frank Makrides

Frank Makrides

Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.

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