Are you aiming to reduce your monthly mortgage payments, secure a lower interest rate, or turn a portion of your home equity into cash? You may be thinking about refinancing your home loan. Before you jump in, it’s helpful to understand how the process works. By learning the mechanics of refinancing a mortgage, you’ll be better prepared to navigate the various steps and ultimately identify the best loan option for your unique situation.
Clarify why you want to refinance.
Start by clearly determining your reasons for refinancing. With these in place, you’ll have an appropriate framework to evaluate your refinancing options and assess which loan option best suits your needs.
Check your credit and the value of your home.
It’s critical to check your credit report before you begin applying for refinancing. Your credit profile plays an important role in determining your eligibility for a new loan and its terms, so you’ll want it to be as strong as possible. Any errors or inaccuracies on your credit report could be detrimental and end up costing you by way of a higher interest rate or less favorable terms. You’re legally entitled to a free credit report every 12 months from each of the three major credit reporting companies.
It’s also wise to get an idea of your home’s current value. As with your credit score, it’s advantageous to know where you stand before you begin shopping around for refinancing. A quick web search will turn up dozens of free online tools you can use to estimate the value of your home.
Start shopping and apply for the loan.
Many lenders and financial websites post refinancing rates online for easy comparison. Don’t forget to talk to your current lender, who may be willing to negotiate in order to keep your business. And don’t worry about the impact of multiple credit checks: Within a 45-day window, multiple checks from mortgage lenders are recorded on your credit report as a single inquiry.
When you’ve identified one or more potentially attractive options, you can begin the application process. Generally, lenders will gather the following information during the first phase of the application process: your name, income, Social Security number (to pull a credit report), the property address, an estimate of the property value, and the desired loan amount.
Review the Loan Estimate.
If you meet the lender’s initial qualification standards, the lender will provide you with a loan estimate within three business days. A loan estimate is a standardized document spelling out the estimated interest rate, monthly payment, and total closing costs for the new loan. It will also specify whether you’ve chosen to “lock” the interest rate on your new mortgage, which means your rate won’t change between the offer and closing, under certain conditions. The standardized nature of the loan estimate document makes it easier to make apples-to-apples comparisons across multiple loans.
At this point, the lender has neither approved nor denied your loan application — they’re simply showing you the terms they expect to offer you if you decide to more forward. This is a key opportunity to make sure the terms of the new loan would line up with your financial goals. This is also a good time to negotiate. If you prefer one lender but another offers you better terms, you can show the first lender the other’s quote and ask for more favorable terms.
Gather and submit additional paperwork.
If you decide to move forward, you’ll have to provide additional financial information, such as past paystubs, historical W-2s, personal tax returns, bank account statements, your current mortgage statement, and documents regarding your current homeowner’s insurance.
Get an appraisal.
Next, the lender will order an official appraisal to determine your home’s value. If the appraised value is higher or lower than what you or the lender initially expected, the terms of your loan may be changed, which would be reflected in an updated Loan Estimate.
Receive a final decision and review the Closing Disclosure.
Once the lender provides final approval after reviewing your additional paperwork and appraisal, you’ll receive a Closing Disclosure, another standardized document listing all the final terms of the loan you’ve chosen, including closing costs. You’ll receive this document at least three business days before closing.
Complete the closing.
You’ve reached the finish line! At closing, your credit and employment will be verified again to ensure nothing has changed since you first applied, given the entire process can take several weeks. Assuming everything checks out, your existing mortgage will be paid off and your new one will take its place. Much like at the closing for your original mortgage, here you’ll sign several documents, transfer funds as needed to cover closing costs, and show proof of homeowner’s insurance. If you’ve opted for a cash-out refinance, you’ll receive the funds at closing.
Have you considered all your options?
If you’re thinking of refinancing so that you can tap the equity in your home, it’s smart to consider all your options, including home equity loan products. At Figure, we offer a fixed-rate solution* that gives you full access to your funds up front and also allows you to make additional draws once you’ve started to pay down your original loan. There is only a low origination fee and the process is much simpler than a typical mortgage refinancing: You can get approved in five minutes and funding in five days**.
*The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.
**Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.