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This article first appeared on the Credible blog.
The process of refinancing your mortgage can feel overwhelming. But as long as you follow the necessary steps, refinancing your mortgage could be easier than you might think.
Follow these steps to make sure you’ll meet the mortgage refinancing requirements:
Determine why you want to refinance
Wait the minimum amount of time to refinance your home
Meet the credit score and DTI requirements
Have the necessary paperwork ready
Have the cash to pay closing costs — or roll them into the loan
When you’re ready to begin comparison shopping for a refinance lender, you can start with Credible. It’s easy and 100% free to compare mortgage refinance rates from multiple lenders with Credible.
Step 1: Determine why you want to refinance
Before you refinance your home loan, be sure to think about why you want to refinance in the first place. Here are a few potential reasons why refinancing your mortgage could be a good idea:
You want to lower your interest rate
When you bought your home, mortgage rates were likely much higher than they are now. Or maybe your credit wasn’t as strong, so you had to settle for a higher rate. By refinancing your mortgage, you might be able to lower your interest rate and save money over the life of your loan.
You want to reduce your monthly payment
When you refinance your mortgage, you take out a new home loan with a new loan term. If you choose to extend your repayment term, you could get a lower monthly payment, which will give you more breathing room in your budget. You might also end up with a reduced monthly payment if you qualify for a lower interest rate.
You want to pay off your home early
If you decide to shorten your repayment term (such as going from a 30-year loan to a 15-year loan), you’ll have a higher monthly payment — but you also might be able to pay off your loan faster. With a shorter loan term, you’ll be paying much less in interest charges, which will bring the overall cost of your mortgage down.
A mortgage payment calculator can help you understand how refinancing could affect your monthly mortgage payment.
No matter which type of refinancing you choose, be sure to compare your rates from as many lenders as possible to find the right loan for your situation. Credible makes this easy — you can see your prequalified rates from multiple lenders in a few minutes.
You want to switch from an adjustable-rate mortgage to a fixed-rate mortgage
If you’re worried about your interest rate fluctuating, you could switch your loan from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage by refinancing. With a fixed-rate mortgage, your interest rate will stay the same for the entire length of your loan.
You want cash for home improvements or other needs
With a cash-out refinance, you replace your current mortgage with a new loan for more than you owe on your home. You’ll get the difference between the loan and your existing mortgage in cash, which you could use to pay for home improvements, your child’s college education, debt consolidation, or other expenses.
Step 2: Wait the minimum amount of time to refinance your home
Depending on the type of mortgage you want and the lender you go through, you might have to wait a certain amount of time after you close on your original mortgage to refinance.
Here are some typical wait times you might experience:
Cash-out refinance: If you’re planning on a cash-out refinance, you typically have to wait six months after your original mortgage closes.
FHA loan: To refinance an FHA loan with an FHA Streamline Refinance loan, you have to wait 210 days.
Loan modification: If you modified your original loan to make your loan payments more affordable, you might have to wait as long as 24 months to refinance.
Keep in mind: Some lenders will charge prepayment penalties if you pay off your mortgage within three to five years. This includes paying off your original mortgage by refinancing.
How home equity and loan-to-value ratio impact refinancing
No matter what type of mortgage you have, your home’s equity plays a big role in your ability to refinance. Lenders will look at your home’s equity and loan-to-value (LTV) ratio to determine if you’re eligible for mortgage refinancing. Here’s how each of these work:
Equity is the amount your home is currently worth, minus what you currently owe on your existing mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your home’s equity is $100,000.
LTV ratio is how much you owe on the mortgage divided by the current value of the home. For example, if your home is worth $300,000 and you owe $200,000, you would divide $200,000 by $300,000 to get an LTV of 66.67%.
Typically, you only need 5% equity for a conventional refinance. But keep in mind that if your equity is less than 20%, you’ll pay higher fees, have a higher interest rate, and have to pay for mortgage insurance.
If you have an FHA loan, there’s an FHA streamline program that lets you refinance even if you have negative equity. However, mortgage insurance is required.
Step 3: Meet credit score and DTI requirements
Next, make sure your credit score and debt-to-income (DTI) ratio meet lenders’ refinancing requirements.
Here are the typical criteria you’ll have to meet:
Credit score: For a conventional mortgage refinance, you’ll generally need a credit score of 620 or higher. But some government programs have credit score requirements as low as 500 — or even no credit score minimum at all, such as with the Department of Veteran’s Affairs Interest Rate Reduction Refinance Loan.
DTI ratio: Your DTI ratio is the total amount of your monthly debt payments divided by your gross monthly income. This is what lenders look at when deciding if you’ll be able to afford your mortgage payments. In most cases, the highest DTI you can have to get approved for mortgage refinancing is 43%.
Step 4: Have the necessary paperwork ready
When you refinance your mortgage, you’ll usually need to have a significant amount of paperwork to provide proof of your income, assets, employment, credit, and property. It’s a good idea to gather the following documentation before meeting with a lender:
Two most recent pay stubs
Two most recent W-2 forms
Two most recent tax returns
If self-employed, proof of self-employment (e.g., business license, proof of liability insurance, accountant letter)
Business income (if applicable):
Business income federal tax returns from past two years
Business financial statements
Two most recent bank statements
Two most recent statements for any investment or retirement income (if using accounts for loan qualification)
Most recent mortgage statement
Most recent billing statements for car loans, student loans, or personal loans
Homeowners insurance policy information
Name and contact information of homeowners association representative (if applicable)
Step 5: Have the cash to pay closing costs — or roll them into your new loan
Closing costs generally range from 2% to 5% of the loan principal. On average, the closing costs on a mortgage refinance are about $5,000, according to Freddie Mac. While you don’t have to have cash on hand to cover your closing costs, paying the costs upfront could help you save money on interest charges over time.
If you don’t have enough cash saved to cover your closing costs, you might be able to take advantage of a no-closing-cost refinance.
There are two types of no-closing-cost refinancing:
The lender pays your closing costs but charges you a higher interest rate. The higher rate applies to the loan until you either pay it off or refinance again.
Your lender rolls the closing costs into your loan’s principal. You don’t have to pay the closing costs upfront, but you’ll pay interest on the closing costs over the life of the loan.
How much could I save by paying my closing costs upfront? Let’s say your closing costs are $5,000 on a $150,000 refinance. If you choose a no-closing-cost refinance and wrapped these costs into a 30-year loan at a 3.5% interest rate, you’d pay $3,078 in additional interest charges over the life of the loan.
That means you could have saved over $3,000 by paying your closing costs upfront.
What to do if you don’t qualify to refinance your mortgage
Unfortunately, not everyone will qualify for mortgage refinancing. Here are a few reasons why your application could be denied:
Your credit score is too low: If you have poor credit, focus on improving it. Be sure to make all of your monthly payments on time and pay down existing debt.
You have a high DTI: If your DTI is too high, try to reduce your monthly obligations by paying down debt like credit card balances, personal loans, or car loans. If you have high minimum payments, a debt consolidation loan might help reduce your monthly payments and lower your DTI.
You have a lien on your home: A mortgage itself is a voluntary lien. But if you have an involuntary lien (such as from tax liabilities), you’ll need to clear the lien before you can refinance. You can search for liens at the county recorder’s office or with a title company. Once you’ve resolved a lien (or if a lien has been resolved but wasn’t recorded), be sure to file a notarized Release of Lien form to clear your title.
You’re underwater on your mortgage: Being underwater on your mortgage means you owe more than your home is worth. If this is the case, look into programs designed for people with declining home values. The Federal Housing Finance Agency’s Home Affordable Refinance Program (HARP) and Freddie Mac’s Enhanced Relief Refinance Mortgage program are two options if you’re underwater on your mortgage and want to refinance your home.
Before refinancing your mortgage, be sure to shop around and consider as many lenders as possible to find the right loan for you. With Credible, you can compare your rates from multiple lenders — and save money in the long run.
About the author: Kat Tretina is a freelance writer who covers everything from student loans to personal loans to mortgages. Her work has appeared in publications like the Huffington Post, Money Magazine, MarketWatch, Business Insider, and more.