Before you begin, consider why you want to refinance your home loan. Your goal will guide the mortgage refinance process from the beginning.
- Reduce the monthly payment. When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term — say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.
- Tap into equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out refinance and a lower interest rate at the same time.
- Pay off the loan faster. When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year mortgage. One downside is that the monthly payments usually go up.
- Get rid of FHA mortgage insurance. Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium (MIP) you pay on FHA loans cannot in many cases. The only way to get rid of FHA mortgage insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Estimate your home value, then subtract your mortgage balance to calculate your home equity.
- Switch from an adjustable to a fixed-rate loan. Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans stay the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.
Should I refinance into another 30-year loan?
Reducing your monthly payment is usually the goal. And it’s tempting to refinance with another full 30-year term to lower your mortgage payment. But that means you’ll end up taking even longer to pay off your house and paying more interest over the long run.
Instead, you can ask the lender to match your remaining loan term. For example, if you’ve had a 30-year loan for three years, you have 27 years remaining. You can tell the lender to set up the payments, so you repay the refinanced loan over 27 years instead of 30. This way, you reduce the interest you pay over the life of the loan. This is mortgage amortization at work.
Refinancing a mortgage, step by step
Ready to tackle the refinance process? Go!
- Set your goal. Reduce monthly payments? Shorten the loan term? Get rid of FHA mortgage insurance?
- Shop for the best mortgage refinance rate. Keep an eye on fees, too.
- Apply for a mortgage with three to five lenders. Submit all applications within a two-week period to minimize the impact on your credit score.
- Lock your interest rate. When you lock the interest rate, it can’t be changed during a specified period. You and the lender will try to close the loan before the rate lock expires.
- Close on the loan. This is when you’ll pay those closing costs that were listed in the Loan Estimate and again in the Closing Disclosure. Closing on a refinance is like closing on a purchase loan, with one main difference: No one hands you the keys to the home at the end.