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How Refinancing A Mortgage Works: A Guide

4-minute read

Your home is an investment, and refinancing is just one way you can use your home to leverage that investment. There are a number of reasons you may want to refinance including getting cash from your home, lowering your payment and shortening your term. Let’s look at how refinancing a mortgage works so you know what to expect.

What Does It Mean To Refinance A Mortgage?

When you refinance your mortgage, you get a new loan for your home. The new loan pays off the old one so you’re left with just one loan and payment.

There are a number of reasons people refinance their homes. You can use a refinance to cash in on your home’s equity or get a better interest rate, among other things. A refinance could also be used to remove another person from the mortgage, which often happens in the case of divorce.

Get approved to refinance – right here, right now.

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The Refinancing Process

The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. Here’s how the refinancing process works.

Apply

When you apply to refinance, your lender asks for all the same information you gave them when you bought the home. They’ll look at factors like your income, assets, debt and credit to determine whether you can pay back the loan.

Lock Your Rate

After you get approved, you’ll typically be given the option to lock your interest rate so it doesn’t change before the loan closes.

Rate locks typically last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender. If your loan doesn’t close before the lock period ends, you may be required to extend the rate lock, which may cost money.

You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This may allow you to get a lower rate, but it also puts you at risk for getting a higher one. If you’re happy with rates at the time you’re applying, then it’s generally a good idea to go ahead a lock your rate.

Underwriting

Once you submit your application, your lender begins the underwriting process. During underwriting, your mortgage lender verifies your financial information and makes sure that everything you’ve submitted is accurate.

During underwriting, your lender will verify the details of the property – just like when you bought your home. This includes ordering an appraisal to determine the home’s value.

The appraisal is a crucial part of the refinance process because it determines exactly what options are available to you. If you’re refinancing to take cash out, for example, then the value of your home is key to determining how much cash you can get. If you’re trying to lower your mortgage payment, then the value could impact whether you have enough equity to get rid of private mortgage insurance or be eligible for a certain loan option.

When you bought your home, you probably weren’t present for the appraisal inspection. Now, as the homeowner, you can be there when the appraiser visits. To prepare for the appraisal, you’ll want to make sure your home looks its best. Tidy up as best you can and complete any minor repairs that’ll help leave a good impression with the appraiser. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.

Closing

Once underwriting is complete, it’s time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. That’s where you’ll see all the final numbers for your loan.

The closing for a refinance is typically even faster than the closing for a home purchase. The closing is usually attended by the people on the loan and title, and a representative from the lender or title company. At closing, you’ll go over the details of the loan and sign your loan documents. This is also when you’ll pay any closing costs that aren’t rolled into your loan. If your lender owes you money (i.e., you’re doing a cash-out refinance), you’ll typically receive the funds a few days after closing.

What Does Refinancing Cost?

The total cost of a refinance depends on a number of factors like your lender and your home’s value. In general, you can expect to pay 2% – 3% of the total value of your loan.

The nice thing about refinancing is that you may not have to pay those costs out of pocket. In some cases, you can roll your closing costs into your loan so you don’t have to bring any money to the table. When you apply online to refinance with Rocket Mortgage®, we’ll automatically roll all your closing costs into your loan.

Why Should You Refinance Your Mortgage?

Change Your Loan Term

Many people shorten their loan term to save on interest. For example, say you started with a 30-year loan but can now afford a higher payment. You might refinance to a 15-year term to get a better interest rate and pay less interest overall. You can also lengthen your term to lower your payment.

Lower Your Interest Rate

Interest rates are always changing. If rates now are better than they were when you got your loan, refinancing might make sense for you. Lowering your interest rate can lower your monthly payment and allow you to pay less interest over the life of your loan.

Change Your Loan Type

There are many reasons a different type of loan may benefit you. Perhaps you originally got an adjustable rate mortgage to save on interest, but you’d like to lock in a fixed interest rate while rates are low. Maybe you finally have enough equity to refinance from an FHA loan to a conventional without paying for private mortgage insurance. Rocket Mortgage® can help you evaluate whether a different loan type could help you save money.

Cash Out Your Equity

With a cash-out refinance, you borrow more than you owe on your home and pocket the difference as cash. If your home’s value has increased, you may have enough equity to take cash out for home improvement, debt consolidation or other expenses. Using cash from your home allows you to borrow money at a much lower interest rate than other loan types.

Summary

Whether you want to adjust your loan term, get a better interest rate, change your loan type or cash out your home's equity, refinancing is a great way to use your home as a financial tool. To see your refinance options and lock your rate, apply online now with Rocket Mortgage® by Quicken Loans®.

Get approved to refinance – right here, right now.

See expert-recommended refinance options and customize them to fit your budget.

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