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How to Refinance Your Mortgage

After setting your refinance goal and researching your home's value, compare refinance rates and fees from multiple lenders.
December 21, 2015
Managing Your Mortgage, Mortgages
Best Refinance Lenders
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We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

You made it through one of the toughest challenges: buying a home. Now, perhaps just a few years later, you’re ready to refinance your mortgage. How hard can it be? You may be surprised to find that it’s not a couple-of-emails-and-a-phone-call-or-two process. In fact, there may be more paperwork involved this time around than when you first bought your home.

Let’s consider some important initial steps of a mortgage refinance — and then run through the rest of the process step by step.

Why you might want to refinance

Before you begin, it’s important to consider why you want to refinance your home loan in the first place. That guides the mortgage refinance process from the very beginning.

» MORE: Notify me when I can save by refinancing.

Lowering your payment is usually the goal. And it’s tempting to refinance with another full 30-year term to really knock down that monthly payment. But that means you’ll end up taking even longer to pay off your house and paying more interest.

Choosing a suitable loan term for your mortgage refinance is a balancing act between an affordable monthly payment and reducing your borrowing costs.

You’ll want to take into account how much interest you’ve already paid on your old loan and how much you’ll pay with the refinance. Loans are front-loaded with interest, so the longer you’ve been paying, the more each payment is going toward paying off the principal balance — and the more interest you’ve already paid. Comparing what you’ve paid in interest so far and what you will pay on your current loan versus the refi will give you a solid idea of your total loan costs for either option.

By resisting the urge to extend your loan term, you can instead refinance to reduce the term and to get a lower interest rate, which could significantly reduce the amount of interest you pay over the life of the loan.

Choosing a suitable loan term for your mortgage refinance is a balancing act between an affordable monthly payment and reducing your borrowing costs.

Use a mortgage refinance calculator

Once you know you have a good reason and you’ve determined it’s the right time to refinance, it’s time to work the numbers. Using a mortgage refinance calculator can help you shop for the best mortgage.

You’ll need to know (or make some educated guesses about) your new interest rate and your new loan amount.

After you input the data, the tool will calculate your monthly savings, new payment, and lifetime savings, taking into account the estimated costs of your refinance.

Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can enter the terms they offer you into the calculator to help determine which one offers the best deal.

It’s also key to shop the best refinance rates

Now it’s time for a little legwork — or more likely web work and phone calls. You want to shop for your best mortgage refinance rate and get a loan estimate from each lender. Each potential lender is required to issue the estimate within three days of receiving your basic information.

The estimate is a pretty simple three-page document that details the loan terms, projected payments, estimated closing costs and other fees.

Compare the loan details from each lender and decide which one is best for you. This is a good time to really work that mortgage refinance calculator.

Refinancing your home loan, step by step

Ready to tackle the whole refinance process? Go!

  • Determine your goal. We’ve covered this: Refinance for the right reason. Aim to shorten — or at least maintain — your current loan term while lowering your interest rate.
  • Learn your current credit score. Check your credit history and get your credit score. The better your score, the better the mortgage refinance interest rates you’ll be offered.
  • Research your home’s current value. Check your neighborhood for recent sales of homes like yours. Estimate your home value with NerdWallet’s free home value tool.
  • Shop for your best mortgage rate. Start by comparing refinance rates online. You can shop rates online all you want, but limit the window for submitting loan applications, or allowing your credit report to be pulled, to a two-week period to lessen the impact on your credit score.
  • Know your all-in costs. A home loan refinance can trigger a bunch of fees: application fees, the cost of an appraisal, origination fees, a document processing fee, an underwriting fee, a credit report charge, title research and insurance, recording fees, tax transfer fees and points, to name several. But remember, you’ll get a clear estimate of mortgage loan fees from each lender you consider. And don’t jump blindly for a “no-cost refinance” pitch. This means the lender is moving the upfront fees to your ongoing costs for the loan, in the form of a higher interest rate — or a greater loan balance.
  • Gather paperwork. This can be a bit harder these days because so many of us do our financial business online. But you’ll have to gather, print or download statements, pay stubs, and whatever else the lender will need during the loan process.
  • Lock your rate. You’ll have to decide whether or not, and when, to lock in your mortgage refinance rate with the lender, so the rate you’re offered for your new loan can’t change during a specified period prior to closing. For the logically minded, it’s a hand-wringer — more art than science.
  • Have cash on hand. There are likely to be property taxes and insurance, closing costs and other expenses to pay at closing, so be sure to set aside enough to cover them. Again, it’s listed in your loan estimate, so there should be no surprises. In some cases, these costs can be added to the mortgage balance, which, on the one hand, limits your upfront costs but, on the other, increases what you owe on your home.
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Final tips

If you owe more than your home is worth, you may want to consider whether a government-sponsored mortgage program can be a part of your refinance solution. These programs come and go — and change names from time to time — but they generally allow homeowners to refinance their mortgage no matter how little equity they have in their home.

And for any refinance, be sure to consider how long it will take for you to recoup the fees and expenses.

But refinancing — for the right reason, with a good rate and a suitable term — can enhance your financial position.

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