People take mortgage refinancing loans to meet different ends. One common reason is to simply tap into equity for some cash. Others just want to save some money. Either way, the mortgage refinance process can appear complicated when you’re going through it for the first time. But understanding the steps of mortgage refinance could help borrowers make the most of their refinancing.
Best Mortgage Rates
Step 1 – Figure Out Your Goals
Why do you want to refinance your mortgage? Understanding financial goals can be useful when trying to make any loan product work as well as possible. We’ve covered two major reasons why some people refinance their mortgages. But there are other reasons as well, including:
- Achieving a lower monthly repayment
- Shortening the mortgage term and paying off mortgage debt faster through refinancing
- Switching between fixed-rate and adjustable-rate mortgages
- Getting rid of mortgage insurance
Each goal we’ve mentioned so far is easily defined and narrows down a borrower’s search for refinancing loans. So, the first step is choosing a clear goal. Some find it ideal for borrowers also to know, as closely as possible, how much time, money, or both they should be able to save. Some find setting multiple goals to be helpful. Regardless of the specific goals or how many goals there are, figuring out goals helps set the parameters for the refinancing search.
Step 2 – Compare Mortgage Refinance Companies
After establishing clear goals, the groundwork is set to compare different mortgage lenders. Many lenders offer mortgage refinancing. So, during this step, the borrower can compare the mortgage refinance products alongside their own goals.
Comparing mortgage refinance companies can start as a process of elimination. Borrowers’ abilities to discern between loans can vary based on the difficulty of reaching their specific goals. After that, each borrower’s creditworthiness will also help determine which mortgage refinancing products they qualify for.
Creditworthiness is based on several factors. For mortgage refinancing, the main factors lenders will want to assess are:
- Personal credit score
- Current debt-to-income ratio
- Income (as demonstrated by recent pay stubs or bank statements)
- Current equity in the property
Each mortgage refinance company is entitled to set its own specific requirements for the above and other factors. In general, conventional mortgage refinancing requires a credit score that is fair or better. Like many other kinds of lenders, mortgage refinance providers will view a debt-to-income ratio of 43% or more to be high-risk. Borrowers can pay off existing debt to improve their debt-to-income ratio quickly. Paying off debt quickly could potentially help improve borrowers’ credit scores, but increasing a personal credit score can take longer.
Step 3 – Apply for a Mortgage Refinance
The mortgage refinances application process is the next step. If you qualify for mortgage refinancing, the application process should be fairly straightforward. However, there are several paperwork requirements borrowers need to remember.
For the most part, the paperwork you’ll need is simply proof of:
- Your income
- Your assets and equity
- Employment status
- Your debt
To check borrowers and establish a risk profile, lenders use documents such as:
- Recent pay stubs
- Recent W-2 forms or other forms, where applicable
- The most recent tax returns
- Other employment-related paperwork:
- Proof of self-employment income
- Relevant business licenses
- Accountant letter
For the latter, self-employed individuals and business owners may be asked to provide different or additional documentation. Those who are not full-time employees may have more requirements and difficulty attaining mortgage refinancing. However, borrowers who can prove their self-employment or business activities are stable and enable them to repay the debt would, most likely, qualify for mortgage refinancing.
Step 4 – Lock In Your Interest Rate
When you prequalify for mortgage refinancing, you can then move on to the official application process. After getting approval, borrowers are given the option of locking in an interest rate. This option enables borrowers to lock a rate, so it doesn’t change before the closing process. Locking in an agreeable interest rate is a common practice, ensuring borrowers don’t end up paying more than expected. However, there’s also the rate lock period to consider.
Rate lock periods typically last 15-60 days. This is the period between approval and the actual closing of the refinancing. If the borrower closes during this period, they are entitled to the rates they locked in. If the rate lock expires before closing, borrowers can extend the rate lock, which often means another fee. If the borrower does not extend the rate lock, their rate may change leading up to closing.
Borrowers have the option to “float” their rate. That means they will NOT lock the rate upon approval. This is essentially rolling the dice; borrowers who float their rate may save some money, but they can also end up with a higher rate.
Step 5 – The Lender Underwrites
Upon submission, an underwriter will begin the underwriting process. This is a final verification process.
Underwriters are the final decision-makers. Their responsibilities include verifying all of the information a potential borrower has provided. So, their first job is that of a fact-checker. It is illegal and unwise to lie on a mortgage refinancing application, as underwriters are professionals who often catch misinformation and end loan applications.
Step 6 – Appraise Your House
An appraisal is an important step in any mortgage process. Borrowers go through home appraisals when they get their first mortgage. Then, they get another one when refinancing.
Home appraisals are ordered by mortgage refinancing lenders. The appraiser will then show up at the borrower’s home and provide an estimate of its value.
Borrowers must go through an appraisal. But they can make sure that everything is as tidy and good-looking as possible for when the appraiser arrives. It can also help if the borrower can highlight improvements or anything that could imply greater value.
If the appraisal ends up equal to or higher than the value of the refinancing loan, the underwriting process will be complete. Then, the borrower can move forward to closing. Or, if they choose, they can choose to borrow less or cancel the application.
Step 7 – Close Your Loan
Closing is the final step. Borrowers receive a document called a closing disclosure before the actual closing. This disclosure contains all the refinancing details, down to each number.
The closing process for refinancing is typically faster than it is for a first mortgage. But it’s still important for the borrower to ensure they are satisfied with all the terms now presented to them. At the final closing meeting, the borrower will sign all the loan documents and pay all closing costs.
After the closing is complete, borrowers have a three-day grace period to cancel the refinancing. If all is in order, the borrower is set to complete the process and get their mortgage refinancing.
Borrowers can check out some of the best mortgage refinance companies before considering mortgage refinancing.