What is Involved in Refinancing a Home Loan?

Through the Home Buying Institute website, I’ve been receiving a lot of emails about mortgage refinance. Here are some of the most common questions: What is involved in refinancing a home? How does the process work, and what steps are involved? How do I get started?

So in this post, I thought I’d like talk about the basic process of refinancing a home — what it involves, how you would get started, etc.

The Refinancing Process

When you refinance your home, you’re basically replacing your current mortgage loan with a new one. People do this for a number of reasons. The most reasons for refinancing are (A) to secure a lower interest rate, (B) to switch from an adjustable to a fixed-rate loan, or (C) a combination of these things.

So what’s involved in the refinancing process? Well, you should probably start by figuring out how much equity you have in the home. Why? Because you’ll need a certain amount of equity in order to refinance the home. Most lenders prefer at least 10% equity, all the way up to 20%. There are some new government programs available today, through which you could refinance with less equity than that (See article: Refinancing with No Equity). But in general, you’ll need a certain amount of positive equity to be approved for a refi.

I also recommend that you check your credit score, before you start talking to lenders. The interest rate they give you on the new loan (assuming you’re approved) will be based on your credit score and several other factors. So it’s a good idea to find out where you stand, in terms of your score. You never want to sit down with a lender and have them know more about your finances than you do.

So what else is involved in the refinancing process, after these preliminary steps? Well, once you get this homework out of the way, you should go ahead and apply for some quotes from lenders. This is a necessary step in the process, so you’ll have to do it sooner or later. I’ve come to realize a lot of homeowners fear this step in the process, but I don’t know why. You really have nothing to lose by applying. At best, you’ll get approved and be able to move forward with the refinancing process. At worst, you’ll be turned down — but at least you’ll know why.

If you receive an offer from a lender, you need to run the numbers to see if the loan works out in your favor (See article: Should I Refinance My Mortgage Now?). More specifically, you need to know if your future savings will exceed the closing costs you pay for the refi loan. Yes, you’ll pay various closing costs and fees when refinancing, just like you did when you first closed on the house.

There’s also a good chance the lender will have the home appraised. They do this to find out what it’s worth in the current market, which could be more or less than the amount you paid for the home. These days, many homeowners are shocked to find out how much their property values have dropped. Some even find out that they are now upside down in their mortgage, meaning they owe more than the home is currently worth. It’s hard to refinance in these kinds of situations.

If everything goes well with the initial qualification process, then you’ll move on to the appraisal. If things go well with the appraisal, then you’ve made it to the final stretch. At this point, you would run the numbers like we talked about, to make sure the refi works out in your favor. And then you would eventually close on the loan and pay all of the closing costs. That is what’s involved in the refinancing process.

What’s Involved in a Refi - Summary of Steps

We talked about a lot of different things in this article, so let’s revisit some of the key points. Here are some of the steps involved in a mortgage refinance.

• You should figure out how much equity you have. As a result of the housing market crash and economic recession, your property values might have dropped. If you don’t have much equity (of if you’re upside down in the loan), you’ll have a harder time refinancing the home.
• It’s also a good idea to check your credit score. Your lender is going to check it, so you might as well find out where you stand. You’ll need excellent credit to qualify for the lender’s best rates. In most cases, this means having a FICO score of 760 or higher.
• At some point, you’ll have to apply for a refinance loan. You can do this online to save time. We have some links on this page to help you get started.
• The lender will have your home appraised at some point. This might be one of the first things they do, because there’s no point in moving further into the process if you have negative equity.
• Lastly, you need to run the numbers to see if the refinance loans works in your favor. You need to figure out where the “break-even point” lies. This article explains how to do it.

This article explains what is involved in the refinancing process. If you more questions about this topic, you might want to try using the search box in the upper-right corner. Good luck.