The mortgage refinancing process in 6 steps

 

How does mortgage refinancing work?

Mortgage refinancing replaces your current loan with a new one, typically with terms that better suit your needs. You will need to apply for a new mortgage, and if your approved, you will pay off your existing mortgage with the new loan. The refinance should benefit you in some way. It may be that you will get a lower interest rate, a smaller monthly mortgage payment, or pay off your home loan sooner.

Here are six steps in the refinancing process.

  1. Set clear financial goals. Are you refinancing from an adjustable-rate mortgage to a fixed-rate mortgage? It is best to have a clear picture of what you hope to achieve with a refinance.
  2. Submit your Application and Documents. Fill out your Application and submit all necessary Documents.
  3. Get you Loan Estimate. This is just an Estimate of the Rate and Terms of your new loan as well as some of the associated cost.
  4. Appraisal and Underwriting. Your Home Appraisal will be scheduled and then the Underwriters will review your submitted documents.
  5. Look for Prepayment penalties.
  6. Closing Day. Closing on your refinance is the final step in the process.

 

 

The Six Step Refinancing Process

 

1. Set your refinance goals

The first step in the refinance process is to set a clear goal. Figure out what benefits you want from a mortgage refinance and what type of loan you will need to help you get there.

There are several reasons why a homeowner would choose to refinance their existing loan. For example:

  • Are you trying to save money immediately by lowering your monthly payment?
  • Are you looking to save money long-term by reducing your existing 30-year loan down to a 15 year loan?
  • Do you want to remove private mortgage insurance (PMI) or FHA mortgage insurance?
  • Do you want to cash out your home equity?

Taking out a new home loan can help you achieve any of these goals. But you have to choose the right refinance strategy for what you hope to accomplish. There are four main types of refinancing loans:

  • Cash-out refinance loan: Tap into your home’s equity and use the cash for home improvements, debt consolidation, emergency funds, or any other purpose
  • Home Equity Loan: A home equity loan is similar to cash-out refinance programs in that you will receive cash that can be spent on whatever you choose. But, unlike a cash-out refinance option where you replace your mortgage with a new one, with a home equity loan, you take out a New Mortgage against the equity you have built up in your home.
  • Rate and Term Refinancing: Lower your interest rate, shorten your loan term, or perhaps both. You can reduce your monthly mortgage payment and save on interest over the life of the loan. Or you may want to convert your adjustable-rate mortgage (ARM) to a fixed-rate mortgage to avoid any future increases in your interest rate or mortgage payment
  • Streamline Refinancing: This type of refinance option is only available to those who have Government-Backed Mortgages, like an FHA loan. As the name implies, streamline refinancing is a simplified process that requires far less paperwork than other types of refinancing.

You also need to choose which loan product you will use: Conventional, Jumbo, FHA, VA, or USDA. Many homeowners stick with the same type of loan they currently have. But switching to a different loan type could have added benefits as well.

We can help you understand your refinancing options and help you choose the best loan for your financial situation.

  1. Submit your Application and Documents

Now that you have chosen the best type of refinancing loan that suits your needs, it is time to complete your loan application and submit your financial documents. This is an important part of the process and can impact the amount of time it takes to get your loan closed.

The time to close your loan is significant for many reasons. Mainly your rate lock (Locking in your interest rate). Not closing before your Rate Lock expires can result in costly extension fees or a higher interest rate.

Turning in all your documents on time helps ensure your loan will close in a timely manner. The required documents for refinancing a loan typically include:

  • Paystubs covering 30 days
  • Bank statements from the last two months
  • W-2s and/or 1099s for past two years
  • Tax returns for the past two years
  • Asset statements covering the most recent 60 days
  • Proof of homeowners insurance

Other documents may be required depending on the type of loan for which you are applying and the details surrounding your loan profile. For example, someone who is self-employed will need to provide more documentation than someone who is a W-2 wage earner. Someone who is retired and/or receiving Social Security Benefits will have other requirements, as well.

Additional documents may be necessary depending on your situation and the type of loan for which you are applying. We will provide you with a complete list of the documents that will be needed.

  1. The Loan Estimate

The Loan Estimate (LE) is a standard three-page document provided by your lender. This form provides you with important information, including the estimated interest rate, monthly payment, and total costs for your new loan.

Keep in minds that the Loan Estimate is Just an Estimate. These are NOT the final numbers.

  1. Appraisal and underwriting

The next step of the refinancing process is going through a home appraisal and underwriting. We will order a new home appraisal to verify your current home value. The underwriter will then review your documents and offer conditional and/or final approval for your new loan.

The time it takes for the underwriting process will depend on the lender’s current volume, the complexity of your application, and the availability of appraisers. An appraisal alone can often take one to two weeks, depending on how busy they are at the time.

As the borrower, this part of the refinancing process is mostly a waiting game. But you can often shorten the approval time by providing all your documents right away and responding to additional requests for other documents as quickly as possible.

  1. Look for prepayment penalties

Finally, do not forget to look and see if there are any prepayment penalties associated with your loan. Most mortgages today do not have prepayment penalties, but check just to be sure.

  1. Closing Day!

Closing on your refinance is the final step in the process. Well, almost.

When refinancing, you will encounter the “Right of Rescission.” This is a mandatory three-day waiting period before your loan will fund. It gives you a small window in which you can cancel the refinancing loan if you change your mind.

Provided that you proceed with your loan, you will have a closing day and sign the final papers, just like on your first mortgage. To ensure your closing day is as smooth as possible, consider the following steps:

  • Stay in close contact with your lender in the days leading up to the closing. This can help make certain that all necessary documents and financial arrangements for the mortgage are in place
  • You will need to pay Closing Costs for the refinancing. In some cases, you may be able to roll your closing costs into the loan to avoid paying them upfront
  • Be particularly careful not to apply for additional credit or use credit cards more than usual
  • Underwriters typically check your credit report again just before the closing. Make certain to keep your credit profile as close as possible to how it was when you applied for your loan

These days, lenders are required to issue a Closing Disclosure (CD) within three days of closing. The interest rate, terms, and closing costs on your CD should closely mirror the ones on your Loan Estimate. You should compare the Loan Estimate and the Closing Disclosure for any errors.