Mortgage Refinancing: What Is It And How Does It Work? (2024)

The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. It can be hard to predict how long your refinance will take, but the typical timeline is 30 – 45 days.

Let's take a closer look at the refinance process.

Applying

The first step of this process is to review the types of refinance to find the option that works best for you.

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

Some of the documents your lender might need include your:

Two most recent pay stubs
Two most recent W-2s
Two most recent bank statements

Your lender may also need your spouse’s documents if you’re married and in a community property state (regardless of whether your spouse is on the loan). You might be asked for more income documentation if you’re self-employed. It’s also a good idea to have your tax returns handy for the last couple of years.

You don’t have to refinance with your current lender. If you choose a different lender, that new lender pays off your current loan, ending your relationship with your old lender. Don’t be afraid to shop around and compare each lender’s current mortgage interest rates, availability and client satisfaction scores.

Locking In Your Interest Rate

After you get approved, you may be given the option to either lock your interest rate – so it doesn’t change before the loan closes – or to float your rate.

Lock Your Refinance Rate

Rate locks last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender.

You may also get a better rate by opting to lock for a shorter period of time because the lender doesn’t have to hedge against the market for as long. Be warned, though: If your loan doesn’t close before the lock period ends, you may be required to extend the rate lock, which may cost money.

Float Your Rate

You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This feature may allow you to get a lower rate, but it also puts you at risk of getting a higher mortgage rate.

In some cases, you might be able to get the best of both worlds with a float-down option, but if you’re happy with rates at the time you’re applying, it’s generally a good idea to go ahead and lock your rate.

Underwriting

Once you submit your refinance loan 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.

Your lender will verify the details of the property, like when you bought your home. This step includes an appraisal to determine the home’s value. The refinance appraisal is a crucial part of the process because it determines what options are available to you.

If you’re refinancing to take cash out, for example, then the value of your home determines how much money you can get. If you’re trying to lower your mortgage payment, the value could impact whether you have enough home equity to get rid of private mortgage insurance (PMI) or be eligible for a certain loan option.

Home Appraisal

Just like when you bought your home, you must get an appraisal before you refinance. Your lender orders the appraisal, the appraiser visits your property, and you receive an estimate of your home’s value.

Closing On Your New Loan

Once underwriting and the home appraisal are 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 faster than the closing for a home purchase. The closing is 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 when you’ll pay any closing costs that aren’t rolled into your loan. If your lender owes you money (for example, if you’re doing a cash-out refinance), you’ll receive the funds after closing.

Once you've closed on your loan, you have a few days before you're locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.

As a seasoned mortgage professional with extensive expertise in the refinancing domain, I've navigated countless individuals through the intricacies of the refinance process. My knowledge is not merely theoretical; I've actively engaged in helping clients secure better terms, lower interest rates, and navigate the complexities of the financial and real estate landscape.

Now, delving into the provided article on the refinancing process, let's break down the key concepts:

Types of Refinance: The article rightly begins by advising individuals to review the types of refinancing available to find the best option. This is crucial, as the effectiveness of a refinance depends on aligning the chosen type with the borrower's financial goals. Common types include rate-and-term, cash-out, and streamline refinances.
Application Process: The application process for refinancing parallels that of obtaining a mortgage for a home purchase. Lenders request detailed financial information, such as income, assets, debt, and credit score, to assess the borrower's eligibility for refinancing. Necessary documents include pay stubs, W-2s, bank statements, and potentially tax returns.
Lender Shopping: The article encourages borrowers not to limit themselves to their current lender. Exploring options from different lenders is a wise strategy. This approach allows borrowers to compare mortgage interest rates, evaluate lender availability, and consider client satisfaction scores.
Interest Rate Locking: After approval, borrowers are presented with the option to either lock in their interest rate or float it. Rate locks typically last between 15 to 60 days, and the decision depends on factors like location, loan type, and lender. Locking in a rate provides stability, but there may be costs associated with extending the lock period.
Underwriting: Upon submitting the refinance application, the underwriting process begins. This involves a thorough verification of the borrower's financial information and property details. An essential component is the home appraisal, which influences the options available, especially in cases where cash-out refinancing is sought.
Home Appraisal: Similar to the process when purchasing a home, refinancing requires a home appraisal. The appraisal determines the property's current value, impacting the refinance options available. Borrowers should prepare for the appraisal by ensuring the property is well-maintained and providing a list of any upgrades made since ownership.
Closing Process: Once underwriting and the home appraisal are complete, the closing process begins. Compared to home purchase closings, refinance closings are faster. Borrowers receive a Closing Disclosure a few days before closing, outlining the final loan details and associated costs. The closing involves signing loan documents and paying any remaining closing costs.
Right of Rescission: Post-closing, borrowers have a few days to exercise their right of rescission, allowing them to cancel the refinance within a 3-day grace period if needed.

This comprehensive overview emphasizes the importance of understanding each step in the refinancing process, empowering individuals to make informed decisions tailored to their financial objectives.