1. New Application and Credit Check

When refinancing your mortgage, the mortgage lender will ask that you complete a brand-new home loan application, and the bank will check your credit report and credit score. The fact that you already have a mortgage in your name does not guarantee automatic approval for a refinance. Your financial situation could have changed significantly since you last received a mortgage. Therefore, the bank has to confirm that you are fully qualified for a new loan under current underwriting standards.

Before applying, it is a smart idea to check your credit report for free at AnnualCreditReport.com to fix any errors ahead of time. Keeping your credit score as high as possible will help you secure the best available refinance interest rates.

2. Careful Review of Finances

In addition to a credit check to determine creditworthiness, the bank will also ask for your recent paycheck stubs, bank statements, and tax returns. This thorough review allows lenders to verify your current source of income, debt-to-income ratio, and employment history. Unfortunately, if you became self-employed, took a lower paying job, or quit your job since getting your original home loan, any change to your financial status might disqualify you or require extra documentation.

To keep the underwriting process smooth, assemble these key financial records ahead of time:

3. A Home Appraisal

Before the bank will approve your mortgage refinancing, they will send a licensed appraiser to your house. This is how they assess the current market value of your house, and this step is crucial if you are considering a cash-out refinancing. With a cash-out refinancing, you can borrow money against your equity for debt consolidation, major home improvements, or other financial goals. However, you must have sufficient home equity remaining to receive cash from your property.

4. Closing Costs

Unfortunately, refinancing a mortgage loan will involve closing costs. These costs typically range from 2% to 5% of the total mortgage balance, depending on your loan size and state regulations. Closing costs include the title search, appraisal fee, loan origination fee, and other mortgage-related costs such as discount points. These fees are usually paid out of pocket at closing; however, your lender might wrap these costs into the new mortgage balance to lower your upfront expense.

Here is a breakdown of common refinancing closing costs:

5. New Repayment Period

Refinancing your mortgage loan resets the clock on your home loan term. Therefore, if you are on target to pay off your home loan in a few years, you should carefully consider whether refinancing into a long-term loan is the right choice. Refinancing can create a new 30-year mortgage, or a shorter 15- or 10-year mortgage if offered by the bank. Shorter term lengths increase your monthly payment but drastically cut down on total interest paid over time.

6. Lower Your Interest Rate

The primary reason that many homeowners refinance is to acquire a lower mortgage rate. Since the mortgage rate you receive is directly tied to your credit history and market conditions, it pays to maintain a strong credit profile. You can check consumer resources at the Consumer Financial Protection Bureau to understand how interest rate shifts impact your total loan cost. While borrowers can refinance with a credit score around 620, those with scores over 700 can typically negotiate the lowest mortgage rates available.

7. Lower Your Monthly Payment

By acquiring a lower interest rate, you are ultimately reducing your overall mortgage payment. This is a major plus, especially if your household budget is cash-strapped each month. Lower mortgage payments can free up monthly cash flow, which can be used to pay off existing debt or increase your long-term emergency savings. As mentioned in our section on securing a lower interest rate, even a drop of 0.75% can save hundreds of dollars each month.

With current interest rates fluctuating, timing your refinance strategically can yield significant savings over the life of your home loan. Contact your present mortgage lender to receive a competitive quote, and compare offers from two or three other banks or credit unions using financial comparison tools like Bankrate. Knowing what to expect when refinancing mortgage options will keep you confident through every step of the process. When do you think is the best time to refinance a mortgage loan?