The Process of Refinancing a Mortgage - Step by Step
Current homeowners can sometimes save money by refinancing their existing mortgage. If you’ve never done it before, the process may be confusing and a little overwhelming and it’s important to know what to expect before you start.
At SIRVA Mortgage, we work closely with borrowers to ensure they understand the refinancing process. It’s not a complicated process but you will need to have a general idea of how it works and what you’ll be required to do to refinance your mortgage. Here are the mortgage refinance process steps you need to know.
Step 1: Understanding Mortgage Refinancing
Before you decide whether refinancing your mortgage loan is a good idea, you should understand what mortgage refinancing is and why people do it. Let's start with the definition of refinancing. Simply stated, mortgage refinancing is when you get a new mortgage to replace your existing mortgage. There are various reasons why you might want a new loan.
The most common, overarching reason for people to refinance a mortgage loan is that they want to save money. There are several ways to accomplish that.
Refinance with a lower interest rate. If you bought your home when interest rates were higher, then you may want to refinance when rates are lower to save money both on your monthly payment and on the total interest paid over the term of the loan. It’s important to note that even if your refinanced rate or APR is lower, by refinancing your existing loan, your total finance charges may be higher over the life of the refinanced loan.
Avoid adjustments. People who bought their home with an adjustable rate mortgage (ARM) may want to refinance before the end of the initial interest period to avoid increases.
Eliminate mortgage insurance. If you were required to purchase mortgage insurance because you made a low down payment on an FHA loan, you may be able to eliminate the cost of mortgage insurance after you've gained sufficient equity in your home by refinancing to a conventional loan.
Get cash secured by your home equity. Cash out refinance is a good way to get money to pay your debt or make home improvements.
The home refinancing process is simpler than the process of buying a home because there's no seller involved. Your lender will review your payment history and credit and decide whether to approve you for refinancing.
Step 2: Decide if Mortgage Refinancing is Right for You
Is mortgage refinancing right for you? Here are some questions to ask yourself to determine the answer.
Are interest rates lower now than they were when you bought your home?
Is the initial interest rate for your ARM about to expire?
Are you paying for mortgage insurance because you have an FHA loan, and do you believe you can qualify for a conventional mortgage that might not require mortgage insurance?
Has your credit score improved significantly since you bought your house?
Do you need cash to consolidate debt, pay for home improvements, or make a large purchase such as a new car?
Do you want to shorten your loan term to pay off your home more quickly than you could with your current mortgage?
If you answered yes to any of these questions, then home refinancing might be the right choice for you.
Step 3: Check Your Credit
Before you begin the process to refinance your home loan, we suggest pulling your credit reports from the three main credit bureaus to make sure that the information there is accurate. A credit check is part of every loan application.
You can get free reports once a year directly from the bureaus or on this website. You should check to make sure that there are no fraudulent charges or inaccurate information. If you do spot anything that's wrong, you may dispute that information with the credit bureaus.
Step 4: Compare Types of Loans
What type of refinancing is best suited to your needs? That's an important question to answer before you begin the refinancing process. Here are some of the most common types of refinancing loans to consider before you approach your mortgage lender.
ARM to Fixed Rate Mortgage. Switching from an ARM to a fixed rate mortgage is the most common type of mortgage refinance. It has an immediate, tangible benefit because it can save you thousands of dollars in interest over the term of your loan, if the initial interest rate increases over the years. It also removes the unpredictability of an ARM.
30 vs. 15 Year Term. Another option is to change to a shorter loan term that will enable you to build equity quickly and pay off your refinanced loan in less time than it would take you to pay your current mortgage.
Conventional vs. Cash Out Refinance. The final option is between conventional refinancing and a mortgage refinance that gives you cash that you can use for other purposes, such as home improvements or debt consolidation.
Before you approach a mortgage lender, it's helpful to know what kind of refinancing you want and why you want it. That will enable you to stay focused on what you need.
Step 5: Gather Necessary Documents
Gathering documents before you contact a mortgage lender is helpful because it means you will get a Loan Estimate as quickly as possible and be able to compare the interest rate and closing costs from each lender you’re considering. .
The required documents should be familiar, since these were required when you first applied for a mortgage loan. They include the following:
Copy of homeowner's policy
Keep in mind that if you're self-employed, you may need other forms to document your income such as 1099 forms
Step 6: Apply for Refinancing
After you have the necessary paperwork, it's time to begin the loan process. You should submit complete information to each lender you are considering. It is not necessary that you go to the lender that is currently servicing your mortgage loan. Any lender can process a refinance for you.
Within three days of receiving the required information for a loan application, each lender will provide you with a Loan Estimate. The Loan Estimate is a standardized form that includes important information about your refinance loan, including the interest rate, loan amount, type of refinance loan, your total monthly payment, and your total interest over the term of the loan.
Step 7: Get an Appraisal
The home appraisal is an essential part of the refinance process because it's what tells the lender what your home is worth. If you have made improvements to your home, a current appraisal may be higher than your initial appraisal.
Keep in mind that the lender handles the appraisal. You cannot shop for an appraiser and there is no way to negotiate the fee, which will be included in your closing costs. If the appraisal is lower than you were expecting, you do have the right to dispute it in writing to get the appraisal company to reconsider.
Step 8: Go Through the Underwriting Process
We have good news about the underwriting process for a mortgage refinance. It often happens more quickly and with less uncertainty than the underwriting when you bought your home.
During the underwriting process, the underwriter will review your documentation and determine your eligibility for the type of loan you want. Just as you did when you got your initial home loan, you should be prepared to answer questions as quickly as possible.
Mortgage underwriting may be completed in just a few days.
Step 9: Lock in Your Rate
Locking in your interest rate ensures that you know what you'll be paying in interest over the term of your loan. At this stage in the refinance process, you should know what loan you are getting and what your monthly payment will be.
A rate lock on a mortgage loan ensures that your interest rate won’t change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application. The Loan Estimate disclosure will show your projected closing costs, monthly payment, interest rate, and annual percentage rate, among other details. The lender must provide you with a Closing Disclosure (CD) within three days prior to consummation of the loan, or when you sign the promissory note. You should review the Closing Disclosure thoroughly because it is the formal acknowledgement of the terms of your mortgage refinance.
If you have any issues with the Closing Disclosure, you should inform your mortgage lender immediately. There are 3 triggers that require a new 3 day waiting period for a revised CD. A change to the product, an increase in the APR by more than .125% or adding a prepay penalty. If your lender determines that there is an issue that requires amendment, they must deliver a revised Closing Disclosure to you within three business days.
It's essential to get the information on the Closing Disclosure right because it is this form that your lender will use to create the loan documents.
Step 10: Close on Your Loan
The final step is to close on your loan. The closing for a refinance mortgage is the same as it is for purchasing a home, except for a required three-day right of rescission or waiting period to fund the loan which is detailed below. Since a refinance is a new loan that means you'll need to sign new loan documents. With no seller involved, there will be fewer people required to attend the closing.
You should be prepared to read every document at the closing. For that reason, it may take several hours. While you might be tempted to skip reading several long legal documents, it's essential that you do so to protect yourself. Once you sign, you are obligated to meet the loan requirements.
Your Closing Disclosure will provide you with the final amount of your closing costs and will reflect the mortgage payoff on your old mortgage loan. Just as you did during your initial mortgage process, you will need to have cash on hand to pay the closing costs unless you rolled those costs into your new loan.
After the closing, you will no longer be obligated to the terms of your previous mortgage. If you change lenders, the new lender will pay the balance of your loan with your previous lender. If you stay with the same lender, it is only the terms of the loan that will change. You may have a lower interest rate, a shorter loan term, or cash on hand to use to renovate your home or pay your debts.
Step 11: Right of Rescission
The right of rescission, sometimes called a three-day right of rescission, is a legal protection provided in the Truth in Lending Act. It allows borrowers to cancel certain home loans within three days of closing without incurring any financial penalties.
The right of rescission applies to mortgage refinance loans, most reverse mortgages, home equity loans and home equity lines of credit. It does not, however, apply to new purchase loans.
The TILA was signed into law in 1968, and the right of rescission was designed to protect consumers from predatory lending. The three-day period gives you time to sleep on your decision and maybe even shop around to ensure that you've made the right decision.
When Does the 3-Day Right of Rescission Period Start?
The three-day period starts as soon as three events have occurred:
You've signed the promissory note, or the mortgage contract.
You've received the closing disclosure document.
You've received two copies of a notice stating your right to cancel the contract.
Once the clock starts, you'll have until midnight on the third business day to rescind the contract. Saturdays are considered business days for the purposes of the right of rescission, but Sundays and holidays are not.
If you determine that you want to cancel your loan, you can do so without stating any specific reason.
The mortgage refinance process steps we have listed here should help you prepare for and navigate the mortgage refinance process.
Do you want to refinance your home? SIRVA Mortgage is here to help! Click here to get started now.