How Does Refinancing Work?

November 14, 2019
Posted in Programs
November 14, 2019 derekevansteam

In our last post, we covered the top 4 reasons that homeowners refinance. But what does it actually mean to refinance your mortgage loan? In short, refinancing a mortgage involves taking out a new loan to pay off your original loan. Here, we break down how refinancing actually works.

How Does Refinancing Work?

The process of refinancing a mortgage is similar to the process of getting one in the first place. You’ll need to complete a mortgage application and provide documentation to support the application, like income and asset documents (think paystubs and bank statements). If your credit has improved since you were approved for your first loan, you may have a good chance of qualifying for more favorable terms. Additionally, if rates have dropped since you purchased your home, you’ll be in a better mortgage when you refinance.

You’ll typically see closing costs between $3,000 and $5,000 to cover title work, appraisal, and lender fees—all standard fees for a refinance. Watch out for things like prepayment penalties, which can cause problems down the road if you pay off the mortgage early or refinance again.

After application, and underwriter will review you loan application to ensure it meets all program guidelines before issuing a final approval. A title company will ensure a clear title to the home prior to closing and the closing is typically done at the title company or through a mobile notary.

Different Types of Refinancing

There are two general types of refinance loans you can apply for: rate-and-term, cash-out.

Rate-and-Term Refinance Loan

With this type of loan, the goal is to change the interest rate, loan term or both without making any changes to the amount of the loan. This option is best if you’re trying to save money on your monthly payment or switch your loan from an adjustable rate to a fixed rate. In some cases, though not required, a homeowner may choose to bring money to the closing to reduce their new mortgage balance. This may be worth considering if you’re underwater on your mortgage, want to get rid of private mortgage insurance, qualify for a lower interest rate, or keep your mortgage amount below certain limits.

Cash-Out Refinance Loan

As the name suggests, a cash-out refinance involves cashing out a portion of the home’s equity. Doing so results in a higher loan amount, with the difference typically equal to the amount cashed out. While a cash-out refinance can help homeowners get the cash they need for certain activities, it typically results in a higher monthly payment and interest rate than a rate-and-term refinance loan.

How Do I Qualify for a Refinance Loan?

The qualifications for refinancing a mortgage are similar to the criteria for a new mortgage loan. Lenders will consider several factors, including your:

  • Credit history and score
  • Payment history on your existing loan
  • Income and employment history
  • Home’s current value vs. what you owe
  • Other debt obligations

Have questions or want to see if you qualify? Fill out the form below: