Refinancing a mortgage involves replacing your existing loan with a new one, typically at a different interest rate. The process is simpler than buying a home but involves similar steps. This article will provide a breakdown of the typical refinance process so you can get started.
Refinance Options with First Merchants
Types of mortgage refinance
The first step in refinancing a mortgage is choosing the right type of refinance:
Cash-in refinance
A cash-in refinance involves making a lump-sum payment towards your home loan during the refinance process, resulting in a new mortgage with a smaller principal balance.
This type of refinance may allow for better lending terms by reducing the loan amount. It can be beneficial if you've received a cash windfall and want to change your mortgage terms.
The application process mirrors that of obtaining your original mortgage.
Cash-out refinance
A cash-out refinance allows you to borrow against your home equity by replacing your current mortgage with a larger loan, receiving the difference in cash. The cash can be utilized for virtually anything, such as home improvements, consolidating debts, covering large expenses like education, and making investments.
Although cash-out refinancing offers financial flexibility, it should be approached cautiously in alignment with your long-term financial objectives since it increases your total mortgage debt and may involve higher costs, including the potential risk of foreclosure if payments become unmanageable.
Rate and term mortgage refinancing
Rate and term refinance involves replacing your current mortgage with a new one, typically to adjust the interest rate or loan term.
This refinancing option helps modify your mortgage terms, such as interest rate and repayment duration, which can lower monthly payments or align better with financial objectives when market conditions are favorable.
No-closing cost refinance
A no-closing-cost refinance wraps closing expenses into the loan amount, eliminating upfront payments. While avoiding upfront costs, this option may raise the loan principal or interest rate due to associated lender fees.
Consolidation refinancing
Consolidation refinancing allows borrowers to combine multiple high-interest debts into a single, lower-interest mortgage loan. Refinancing means borrowers can pay off existing debts, like mortgages and credit cards, with more manageable payments. However, this method could extend repayment and may require collateral.
If you need help selecting which refinancing option is best for you, reach out to our experts.
The mortgage refinance process
Refinancing a mortgage typically spans from a few weeks to a couple of months, varying based on the lender's processing time, your financial situation, and any legal processes required. Below are the steps to get you started with a mortgage refinance loan.
1. Define your refinancing needs
Narrow down your search by considering what refinancing a mortgage can achieve for you, such as
- Lowering monthly payments
- Shortening the loan term
- Eliminating mortgage insurance
- Reducing your interest rate
- Tapping into your home equity
- Paying off high-interest debts
Depending on your specific needs, you can refinance your mortgage by replacing your existing home loan with a new one.
2. Scout for the best mortgage refinance rate
When shopping around for the best refinance rate on your mortgage, compare at least three to five lenders and their offers.
While your initial credit check from a lender might slightly drop your score (typically less than five points, per FICO), subsequent checks within a short period indicate rate-shopping and should not impact your score significantly.
3. Selecting a lender to refinance your mortgage
When selecting a lender for mortgage refinancing, carefully review loan estimate documents to assess closing costs. Compare fees and loan terms among lenders to find the best deal tailored to your needs and financial situation.
You are not obligated to refinance with your current mortgage lender. Be sure to conduct thorough research and comparisons before deciding on the best lender for your refinancing needs.
4. Gather the relevant documents for your lender
To facilitate the mortgage refinancing process, ensure you gather proof of income (such as pay stubs, tax returns, or bank records) and records of monthly expenses. It's crucial to have the necessary documents ready, including:
- Wage Statements (W-2s)
- Tax returns
- Pay stubs
- Statements of debts and assets
Lenders use this information to calculate your debt-to-income (DTI) ratio, a critical factor in determining loan eligibility.
5. Mortgage underwriting
Once you submit your mortgage refinance application, underwriters meticulously review your financial background, credit history, and property value to assess eligibility. They analyze your income, debt-to-income ratio (DTI), and employment stability.
An appraisal ensures the home's value aligns with the refinance loan amount. Communication with your mortgage loan officer is key to expediting the process.
Underwriting duration varies from days to weeks and is contingent on document completeness and lender efficiency.
6. Consider locking your interest rate
Once your loan has been approved, you can either lock your interest rate or float it. Locking your interest rate protects against any potential interest hikes while floating it does the opposite - meaning that you could end up with a lower interest rate if they decrease but could equally result in higher payments.
In most cases, depending on the lender, you can secure your interest rate for 30 to 120 days. Some lenders offer free rate locks, while others charge a fee. Locking your rate ensures it remains stable until the finalization of your loan.
You should coordinate with your lender to finalize the loan before the rate-lock period ends.
7. Finalize the loan
If all goes well, it's now time to close the deal. At this final stage, your lender will send you a Closing Disclosure document that outlines the terms of your new mortgage loan.
Final documents will cover the closing costs detailed in the loan estimate and closing disclosure with your chosen lender. Your new loan will be made active after the paperwork is signed and the closing costs are paid. After this step, you simply start paying it back according to the new terms.
The cost to refinance your mortgage
It is important to note that the cost of refinancing varies based on interest rates, credit scores, closing costs, loan terms, and other factors. Gather loan estimates from at least three lenders to find your best refinance deal.
Lenders should provide a refinancing loan estimate within three days of receiving your basic information. The loan estimate is a concise three-page document detailing your estimated loan terms, payments, closing costs, and other fees.
Use our mortgage refinance calculator to understand your unique situation and estimate potential costs and savings on your monthly payments or overall mortgage interest over time.
You can also use our refinance calculator to compare the terms with your existing mortgage. This tool also helps to calculate your "break-even" point. As refinancing typically involves paying fees and refinancing closing costs, it is important to assess this break-even period.
Can you refinance your mortgage at any time?
Although you can refinance your mortgage at any time, there are several factors you should consider, including interest rates, break-even periods, the type of mortgage, the refinance option, and your loan term.
When considering a mortgage refinance, some general guidelines apply:
- Refinance when interest rates are low. Take advantage of lower rates to potentially reduce your monthly payments or overall interest costs.
- Refinance when your credit score is strong. A higher credit score can help secure better refinancing terms and rates.
- Consider refinancing to adjust the length of your loan. Shortening or extending your loan term can impact monthly payments and long-term interest expenses.
Additionally, there may be early repayment charges if you are not at the end of your fixed or discount rate term. Many people opt to remortgage when nearing the end of these terms to ensure they get the best possible deal.
How soon can you refinance a mortgage?
Refinancing a conventional mortgage typically allows for early refinancing without strict waiting periods.
However, some lenders may require a waiting period of around six months before allowing a refinance with the same lender. This restriction does not prevent you from exploring refinancing options with a different lender.
It is important to note that cash-out refinances may have different eligibility requirements and exceptions than regular refinancing.
Is refinancing a mortgage difficult?
Refinancing a mortgage can be challenging, particularly if your credit score is low or you are unsure about the process.
When you refinance, you are securing a new mortgage loan, often for the remaining balance. However, battling closing costs and achieving decent savings if opting for a larger or longer-term loan can be challenging. Luckily, our team at First Merchants can provide expert guidance to navigate this process effectively.
Calculate your mortgage loan refinance today
The cost of refinancing your mortgage can vary based on interest rates, your credit score, closing costs, the loan length, and other factors.
To better understand how refinancing could impact you personally, try using our mortgage refinance calculator. It is a helpful tool that can provide insights tailored to your situation and make your decision-making process more manageable.
