Mortgage Refinance Process: Step by Step

Mortgage refinance rates in the United States have dropped significantly since the pandemic. However, there are still homeowners who do not have favorable rates. Refinancing your mortgage can be a solid strategy for a number of reasons, including obtaining a lower monthly payment, decreasing the overall length of the loan, and getting a lower interest rate. But if you’re a novice to the refinance game, it can be overwhelming to understand how the process works and why it could be beneficial to you as a homeowner. If that’s you, you’ve come to the right place. In this step-by-step guide for the mortgage refinance process, we will break down the steps you should take to have the smoothest refinance process possible and get you on the right track to reaching your desired financial goals. 

How Does Refinancing a Mortgage Work?

To understand how mortgage refinancing works, we’ve created the perfect step-by-step guide to help you follow your journey toward refinance. Before we break down each step, here’s the basics of the list:

1. Determine Your Financial Goals

2. Get Your Finances Prepped & Check Your Credit

3. Research Mortgage Lenders

4. Calculate Your Costs & Gather Documents

5. Compare Offers

6. Lock in Your Rate

7. Complete Loan Application

8. Sign Disclosures & Review Application

9. Submit Application

10. Underwriting and Appraisal

11. Closing and Signing

12. Rescission Period

Now that we have our list of steps let’s dive into each step and help you reach your ultimate goal of refinancing your mortgage!

Determine Your Financial Goals

Establishing your financial goals is crucial before beginning the refinancing process. Reducing monthly payments, lowering interest rates, switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or withdrawing cash for home improvements or additional needs are common goals for homeowners looking to refinance their homes.

The initial and most significant step in the process is to identify your refinancing goals. You may change your refinancing strategy to accomplish these goals by clarifying objectives. For instance, If your goal is to reduce your monthly payments, you can concentrate on getting a loan with a lower interest rate or extending the loan term. You might decide on a shorter loan term if you wish to pay off your mortgage quickly. Knowing what you want to accomplish also enables you to analyze loan offers and ensure they complement your financial strategy. It's an important first step because it establishes the general trajectory of the refinancing process.

Get Your Finances Prepped & Check Your Credit

After you have determined your financial goals and what your plan is for your refinance, it’s time to make sure that your finances are in good shape before you go looking for loan offers and lenders. Make sure that your liquid assets are seasoned for at least two to three months in a verifiable account, and stop spending on your credit cards as much as possible. Additionally, paying off your card balances will help improve your credit score and allow you to go into the refinance process with zero balances on your cards. 

Your credit score heavily influences the terms and interest rates you are eligible for during the refinancing process. Request a copy of your credit report from each of the three major credit agencies (TransUnion, Experian, and Equifax) and check it for any inaccuracies or potential roadblocks. Before submitting an application for a refinance, consider improving your credit score if it is not where you want it to be.

Research Mortgage Lenders

You should search for a lender that provides refinancing options that are in line with what you want. You can perform online lender research, ask friends and family for suggestions, or talk with a mortgage broker who can put you in touch with a variety of lenders. To be sure they are knowledgeable, look for people who specialize in refinancing.

In the refinancing process, picking the right lender is an important choice. Different lenders provide varying terms, interest rates, and types of service. Researching and evaluating various lenders is a smart move if you want to make an informed choice. This can be achieved by looking at online reviews, getting referrals from folks you trust, or working with a mortgage broker who can put you in touch with several reputable lenders. Choosing a lender with experience in mortgage refinancing can be helpful since they will have a better understanding of the details of the entire process and be able to help you navigate it smoothly. The terms of your new loan and your future financial security may be significantly impacted by the lender you choose, so this is a choice that demands thoughtful consideration.

Calculate Your Costs & Gather Documents

Do your best to identify and understand refinancing costs, including prepayment penalties, closing costs, and application fees. You should consider all of these costs while making your decision because they can impact the overall benefit of refinancing. 

Lenders need accurate financial information to evaluate your creditworthiness, income stability, and ability to manage a new mortgage. The application process is more straightforward and your financial credibility is shown by having these documents ready for your lender. Your pay stubs, tax returns, and bank statements are among the documents that are required for a refinance. Bank statements validate your available assets and financial obligations, whereas tax returns give you a complete picture of your financial history. Lenders can better comprehend the context of your refinance using information about your current mortgage, such as the loan statement and terms. You might be able to speed up the application process and improve your chances of a smooth approval by having these documents ready in advance. Accurate and thorough documentation allows you to make a strong case to lenders, which may result in better offers.

Compare Offers

It's critical to compare offers from multiple lenders to make sure you get the best terms and conditions and save money over the course of your loan. The interest rates, closing costs, and loan terms offered by each lender may differ, so it is important to gather and evaluate several offers. Start by comparing the interest rates offered, as even a small change in the rate over time might result in major savings. Also, think about the entire amount of the closing costs because they can determine how much your refinance will cost altogether. Review the loan terms as well to make sure they align with your financial objectives. For instance, choosing a longer loan term may result in cheaper monthly payments, whereas choosing a shorter period may result in a quicker mortgage payoff. Making an informed decision requires careful analysis to ensure the refinance will help you reach your financial goals.

Lock in Your Rate

A rate lock is a vital strategy to protect against interest rate changes while your refinance application is being processed. Daily swings in interest rates can affect your monthly payments and the overall cost of your new mortgage. You have the choice to lock in the interest rate for a set period, usually 30 to 60 days, when you locate a lender with terms that satisfy your goals. This means that regardless of any increases in the market rate, the interest rate on your loan will stay set at the agreed-upon amount. A rate lock gives you peace of mind by guaranteeing that you will be granted the terms and conditions you were given at the time of the lock. Remember that rate locks may have expiration dates, so it's crucial that you finalize your loan by the predetermined deadline to prevent rate modifications.

Complete Loan Application

Just like your initial loan application for your mortgage, you will have to complete your application for your refinance. You must fill out the formal loan application and include your general information such as your property address, contact information, employment status, income, assets, etc. The application shouldn’t take you more than twenty minutes to complete!

Sign Disclosures & Review Application

Once you’ve completed the application, you’ll have to review and sign a page for disclosures, which have to do with your privacy rights, credit report, taxes, and specific insurance information pertaining to your refinance. These disclosures allow the lender the right to collect information about you to confirm the details you have provided to them on your application, including your tax returns or a consumer credit report. Take a moment to double-check and review the disclosures and your entire application while you’re at it to ensure there aren’t any other errors.

Submit Application

Once you’ve reviewed your application and the disclosures, it’s time for you to submit your application. Once you’ve submitted it, the loan officer will order a credit report and start to review your application. If there are any issues or errors to address, they will likely contact you before sending your application to the lender. They might ask you for things like tax returns, pay stubs, bank statements, insurance policy information, or other information to verify certain aspects of your application. Sometimes, you might have to fill out a form for the home appraisal, which can act as the fee for the loan application. This also helps get the process moving along.

Underwriting & Appraisal

The lender carefully evaluates your application and financial records during the underwriting stage to determine your creditworthiness and risk profile. This comprehensive assessment guarantees that you adhere to the lender's requirements and that the proposed loan is appropriate, given your current financial standing. If you are eligible for the refinancing terms, the lender will examine your income, employment history, debts, and other significant financial details.

Your home must be appraised in addition to the underwriting process to determine its current market value. A qualified appraiser evaluates the property's size, location, and most recent nearby comparable sales during the appraisal. The evaluation is essential since it directly affects the refinance loan amount. The appraiser's report ensures that the loan amount fairly represents the property's value.

Closing and Signing

The refinancing procedure ends with the closing. It's the time when the deal has been finalized, and the new loan becomes effective. At the closing, you'll meet with your lender and potentially other parties involved in the transaction, such as a title firm or lawyer. You will sign a number of mortgage-related paperwork during this meeting, including the deed of trust and the promissory note. Any additional closing fees and charges are your responsibility. The fees charged by the lender, title insurance, recording fees, and other expenditures related to the refinance are sometimes included in these costs.

The funds from the new loan will be used to pay off your old mortgage, and the new mortgage, with all of its terms and conditions, will then go into effect. Before signing any paperwork, it's important to carefully read them through and ask any questions you might have. You'll start making payments on the new mortgage as soon as the closing is finalized, marking the end of the refinancing process.

Rescission Period

Once your refinance documents are signed, the cooling-off period begins. This is also known as the right of rescission. This period lasts three full business days, starting at midnight the day after you sign the paperwork. This cooling-off period allows you to think over the transaction and gives you the option to back out of it if you so choose, for whatever reason. If you do decide to rescind the transaction, you must let the lender know as soon as possible. Most of the costs you paid during the transaction should be refunded to you.

How To Find a Mortgage Refinance Lender

Are you looking at refinancing your mortgage but can’t find the right mortgage refinance lender that fits your needs and goals? Don’t feel stressed. It can be overwhelming trying to navigate the refinance process. Expertise.com has an online directory of the top mortgage refinance lenders that you can access at your fingertips. Their directory of lenders allows you to find the right lender in your area and one that shares your desire to find the best mortgage refinance option to fit your needs. Visit their online directory today to get started!