How to refinance your mortgage

In a nutshell

Refinancing the mortgage on your home can lower your monthly payment, let you pay off your loan faster, or provide extra cash. But be aware of the costs.

• Refinancing your mortgage is essentially taking out a brand new loan that resets the clock on your interest payments.
• You will also incur new closing costs when you refinance your mortgage.
• Other options include a home equity line of credit (HELOC) or a home equity loan.

Understanding how refinancing works and when to do it can help you decide whether exchanging your current mortgage loan for a new one is a good move for you now or in the future.

What is mortgage refinancing?

Mortgage refinancing is a process that replaces your current home loan with a new one that is different in some way. For example, many people refinance their mortgage in order to lock in a lower interest rate, and others increase the loan amount of their mortgage in order to get cash out. Refinancing to drop private mortgage insurance (PMI) is also common, and some homeowners refinance in order to get a different type of mortgage altogether.

At the end of the day, mortgage refinancing is a process that lets you upgrade your home loan without moving or giving up ownership of your property. You only need to apply to get the process started, and the core of the work involved comes in the form of paperwork and gathering documents for the lender.

How does mortgage refinancing work?

When you take steps to refinance your mortgage, you are essentially taking out a new home loan on a property you already own. The proceeds of your new loan are then used to pay off the original mortgage on your home. This means that after the refinancing process is over, you'll be left with a single new home loan you've chosen and one monthly mortgage payment to make.

Generally speaking, refinancing your mortgage can take anywhere from 30 to 45 days. The process requires an array of paperwork to be completed, and the homeowner has to meet lender qualifications for the new mortgage they want.

6 steps to refinance your mortgage

The steps required for mortgage refinancing are similar to those that take place during the initial purchase of a home.

Step 1: Determine your goals

The first step in refinancing your home loan is to have a clear purpose or a goal. For example, you might decide to refinance your home because interest rates are lower now than they were when you took out your first mortgage. Other reasons to refinance can include tapping into home equity or extending the length of your repayment term in order to score a lower monthly payment.

Just remember that refinancing can reset the repayment period on your loan, and it could even have you paying your home off for several more years. While securing a lower interest rate can help you pay a lower monthly payment, a longer repayment timeline can lead to paying more interest charges to the bank.

At the end of the day, refinancing your home loan will have consequences of some kind, which can be both good and bad. Either way, knowing your reasons for refinancing can help you know if it's for you. If you don't really have a reason to refinance or you don't see any benefits in doing so, you should just stick with the mortgage you already have.

Step 2: Apply for a mortgage refinance

Once you know what you're trying to accomplish with a mortgage refinance, you can take steps to apply with a company like SunTrust or Truist. It's crucial to remember that you can refinance with any mortgage company you want. You do not have to go with your current lender, and you are likely to find better rates and terms elsewhere if you shop around.

You'll need to fill out a standard mortgage refinance application to get started, which asks for information such as your income, your assets, and your employment details. You'll also need to share your Social Security number and your personal information, after which the mortgage company will place a hard inquiry on your credit report.

In the meantime, you will need to supply some information to your mortgage company, which you can usually scan and upload online. Paperwork you may need to supply can include two recent pay stubs, your most recent W-2s, and two of your most recent bank statements. In some cases, the mortgage company may request access to your online banking information so they can gather that part of your data directly.

Step 3: Lock in your rate

Once your mortgage finance is approved, you get the chance to lock in your interest rate for anywhere from 30 to 60 days. The length of your rate lock depends on an array of factors, such as your loan type, the lender you're working with, and where you live.

Rate locks intend to give you some time to close on your mortgage with the rate you were given when you applied. According to the Consumer Financial Protection Bureau (CFPB), not locking in your rate means it can change at any time during the refinance process based on market conditions.

Step 4: Underwriting

The next step in refinancing a mortgage is the underwriting process, and this step is mostly taken care of by your mortgage company.

During this stage, the company will go through all your information to check for accuracy and completion. They may also ask you for additional documentation during the underwriting process, such as updated banking statements, your tax returns, or proof of assets you own.

Step 5: Get an appraisal

As the underwriting process continues on, you'll also need to get a refinance appraisal of your home. This appraisal shows what your home is currently worth and can affect your ability to get the type of refinance loan you want.

If you are hoping to do a cash-out refinance so you can access some of your home equity, for example, an appraisal that proves your home's value will show how much equity is available to you.

Step 6: Close on your loan

The final step of refinancing involves closing on your home loan, just like you did when you purchased the property. However, a refinance loan closing comes with less fanfare than a home purchase since you already have possession of your home.

A few days before your refinance closing appointment, your mortgage lender will send you a document called a Closing Disclosure. This document shows all the final numbers for your home loan, such as the new loan amount, the new interest rate, the monthly mortgage payment, and all the closing costs you're paying to complete the process. If you see any errors on your Closing Disclosure, you should notify your lender right away.

If everything is in order, the closing on your refinance involves signing all the loan documents for your new loan. It's possible to owe money for your refinance, in which case you'll need to bring a cashier's check or a certified check for the amount you owe. That said, you may also receive a check for funds owed to you at closing if you chose a new loan that lets you get cash back.

When should you refinance your mortgage?

The benefits of refinancing your mortgage depend on when you refinance and why. Here are the main reasons homeowners change out their home loans for a new one, plus an overview of what they gain when they do.

Change your interest rate

Most homeowners who refinance try to get a lower interest rate than they have now. This move can help them lower their long-term borrowing costs, their monthly payment, or both.

If you're considering a refinance to secure a lower interest rate, pay careful attention to the direction rates are moving and time your refinance accordingly. For example, the national average 30-year fixed refinance rate dropped from 8.02% to 7.22% between November 2023 and January 2024. Many experts believe rates will drop even further by the end of 2024.

Change your loan term

Another reason to refinance involves changing up your loan's term. Examples include moving from a 30-year mortgage to a 15-year loan that helps you get out of debt faster or switching loan terms to get a longer loan with a lower monthly payment.

Refinancing to change your loan term can also lead to a lower interest rate, particularly if your new loan has a shorter repayment period. The January 2024 national average 30-year fixed refinance mortgage rate of 7.22%, for example, dropped to 6.39% for a 15-year fixed refinance rate.

Get cash out

A recent report from the National Association of Realtors (NAR) showed that the median sales price of single-family existing homes rose 10.5% between 2021 and 2023. This means that most homeowners have around 10.5% more equity in their homes than they did at the end of 2021.

With that in mind, getting cash out with a refinance remains incredibly popular. This type of home loan lets you borrow more than you currently owe on your home and get the difference back in the form of a check. However, it's worth noting that your interest rate and monthly payment can change with a cash-out refinance, sometimes substantially.

Change your loan type

Refinancing to change a loan type is also common, and there are many ways this can go. For example, some people refinance from an adjustable-rate mortgage to a new loan with a fixed interest rate.

Other homeowners, including people who want the lowest possible rate for the short term, may choose to switch from a fixed-rate loan to one with an adjustable rate.

Ditch mortgage insurance

Another popular cause for refinancing is a desire to get rid of private mortgage insurance (PMI) — an extra cost you have to pay in your mortgage payment when you have less than 20% equity in your property. According to the Consumer Financial Protection Bureau (CFPB), your mortgage company is legally required to terminate PMI "on the date when your principal balance is scheduled to reach 78 percent of the original value of your home." If your home value has gone up, getting an appraisal and refinancing can help you get rid of PMI once and for all.

Homeowners with FHA loans can also refinance to ditch the monthly FHA mortgage insurance payments they have to make. Unlike PMI on traditional home loans, FHA mortgage insurance payments never end until the home is paid off or the loan is refinanced with a mortgage that isn't backed by the FHA.

The risks of refinancing your mortgage

There aren't many risks involved in refinancing your mortgage other than the fact you cannot go back. Refinancing is a one-way street, so you cannot change your mind and get your old mortgage (or monthly payment) back if you want to. Your new home loan replaces your old one when you refinance, so your only choice is sticking with it, refinancing to a different home loan again, or selling your home and moving.

Another potential risk of refinancing is getting a sub-optimal deal. It's crucial to run the numbers on your refinance to ensure it's benefitting you in some way, either through lower interest costs or a monthly payment that makes more sense with your budget and goals.

Remember that refinancing your home isn't free. There are closing costs involved, and those closing costs can minimize or even outweigh any benefits you get. A good mortgage calculator can help you figure out what you have to lose or gain by refinancing, and you should consider the impact of closing costs in your calculations.

How much does it cost to refinance your mortgage?

Speaking of closing costs, these can vary depending on the amount you're borrowing, where you live, and the mortgage company you choose for your refinance. However, most refinance loans require you to pay 2% to 6% of the total value of your loan at closing.

For a $300,000 home loan, that means closing costs could range from $6,000 to $18,000. That said, most homeowners with enough equity can roll these costs into their new mortgage so they don't have to bring so much cash to the table.

Some mortgage companies even advertise no closing costs mortgage refinance loans. In this case, homeowners agree to pay a higher interest rate in exchange for eliminating most of the costs involved in acquiring a new home loan.

The AP Buyline roundup: Should you refinance your mortgage?

While only you can decide, the right answer depends on what you have to gain from the situation and whether you're willing to deal with the tasks involved.

That said, the work required to refinance your mortgage can be well worth the trouble. Use a mortgage calculator so you know for sure, then take the steps to apply for a refinance once you're ready.**