12 Refinance Tips For Homeowners: A Helpful Guide

You may choose to refinance your home loan to secure better loan terms, lower your monthly payments, or tap into your home equity. The refinancing process is similar to when you originally bought the house. If you’re ready, the following 12 refinancing tips will help you move forward.

Advice For Refinancing Your Mortgage

Implementing the following 12 tips to refinance your mortgage will help you streamline the process and hopefully secure better terms on your loan. 

1. Determine The Goal Of Your Refinance

The first step is to determine why you want to refinance your mortgage. Once you know what you want to accomplish, it’ll be easier to make decisions about your refinance, like picking your loan terms or mortgage type.

Here are some of the most common refinancing goals:

 
Compare refinance offers from verified lenders:

2. Research Different Types Of Refinances

There are many different types of refinance loans available and researching your options will help you find the one that best fits your situation. Let’s look at some of the refinancing options you can pick from.

Rate-And-Term Refinance

A rate-and-term refinance lets you replace your current mortgage with a new loan with different terms. If you’re trying to save money, you could secure a new loan with a lower interest rate. Or if you’re trying to pay your mortgage off faster, you could replace 30-year loan terms with a 15-year mortgage.

Cash-Out Refinance

A cash-out refinance lets you access the equity you’ve built in your home. When you do a cash-out refinance, you’ll take out a new loan for more than you currently owe on the mortgage. From there, you’ll receive the difference as cash you can use to consolidate debt or pay for home improvements.

Cash-In Refinance

If you’re looking to build equity in your home, you might consider a cash-in refinance. With this refinance option, you’ll make a lump sum payment toward the principal to build equity. A cash-in refinance can help you secure better loan terms and a lower interest rate.

Streamline Refinance

If you have a VA, FHA or USDA loan, you may qualify for a Streamline Refinance. Most borrowers choose this option to lower their monthly payments or secure better loan terms. Each loan type has its own version of a Streamline Refinance program, like an FHA Streamline Refinance and a VA IRRRL. And a Streamline Refinance doesn’t always require a home appraisal since you already qualified for the loan once.

No-Closing-Cost Refinance

A no-closing-cost refinance lets you roll your closing costs into your monthly mortgage payments. You may also have the option to reduce your closing costs in exchange for a higher interest rate.  

A no-closing-cost refinance won’t eliminate your closing costs completely, but it does remove the pressure of having to come up with those funds when you close. However, you’ll make up the difference over the life of the loan.

3. Improve Your Credit Score

Your credit score plays a huge role in determining the rates and loan terms you receive, so you should check your credit before applying for a refinance. The credit requirements will vary depending on the type of loan and your lender, but most borrowers need a credit score of at least 620.

If your credit score isn’t as high as you would like, you can take the following steps to improve your score:

4. Reduce Your Debt-To-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward debt payments. Most lenders look for a DTI ratio no higher than 43%. So if your gross monthly income is $6,000, $2,580 is the maximum amount you should be paying toward total debt payments.

If your DTI ratio is too high, that tells your lender you may be overextended financially. However, you can lower this number by paying off your debt or creating additional streams of income.

5. Calculate Your Home Equity

Your home equity is the difference between what you owe on your home and what it’s currently worth. For example, if you owe $200,000 on your mortgage and the house is worth $250,000, you have $50,000 in equity.

If you want to do a cash-out refinance, most lenders want you to leave at least 20% equity in your home. But if you’re refinancing a VA loan, you can access 100% of the equity you’ve built in your house.

6. Determine Your Breakeven Point

Because of all the costs involved in refinancing, it’s important to calculate your breakeven point — this is the point when your savings equals the costs spent. For example, let’s say you spend $5,000 on your refinance and save $100 per month on your mortgage payment.

That means you’ll need to stay in your home for 50 months, or just over 4 years, to break even. So, if you know you plan to move in the next year or two, refinancing might not make financial sense.

7. Compare Multiple Offers

Shopping around and comparing loan offers from different lenders will help you find the best terms on your refinance. Make sure to carefully review the Loan Estimate paperwork from each lender before submitting a formal application.

Your Loan Estimate is the best way to evaluate multiple offers and choose the best option. It’s a three-page document that outlines the following information:

8. Lock In Your Interest Rate

Once you’ve found a good rate on your refinance, it’s time to ask your lender for a mortgage rate lock. This is an agreement between you and your lender that your interest rate won’t change before you close, regardless of what happens in the market.

The only downside is that you won’t be able to secure a lower rate if interest rates end up falling. But a mortgage rate lock gives you the peace of mind that you won’t get stuck with a higher rate.

9. Gather Your Documents

Refinancing comes with quite a bit of paperwork, so preparing these documents ahead of time will help you stay organized. Here are some of the documents a lender may require for a refinance:

10. Prepare For A Refinance Appraisal

When you refinance, most lenders require a home appraisal to determine how much your home is worth, so they don’t loan you more money than necessary. During an appraisal, a licensed appraiser will evaluate the overall condition of your home, the number of rooms and your home’s location.

They’ll also look at comparable homes in your neighborhood and any improvements you’ve made to the property. Here are some steps you can take to prepare and possibly land a higher appraisal:

11. Save Up For Closing Costs

Refinancing isn’t free, and you can expect to pay between 2% and 6% of the total loan amount on closing costs. So, if you have a $200,000 loan, you can expect to pay between $4,000 and $12,000 on closing costs. That includes the following costs:

12. Get Ready To Close On Your New Home Loan

When you’re preparing to close, it’s important to keep your paperwork in order and be available to respond to any of your lender’s questions. They may need additional information to verify your proof of income or credit history.

Refinancing your mortgage can take anywhere from a few weeks to a couple of months to close. Factors outside your control can delay the process, but staying organized will make it a smoother transition.

See What You Qualify For

Buy A Home

Discover mortgage options that fit your unique financial needs.

Refinance

Refinance your mortgage to have more money for what matters.

Tap Into Equity

Use your home’s equity and unlock cash to achieve your goals.

Mortgage Refinance Tips: FAQs

Refinancing can help you lower your monthly payments or reduce the amount you pay over the life of the loan. Here’s some additional information about refinancing you might find helpful.

Can I use a different lender when I refinance my mortgage?

Yes, you can use a different lender to refinance your mortgage. Comparing offers from multiple lenders is the best way to score better mortgage rates and terms.

How long does the refinance process take?

On average, it takes between 30 and 45 days to refinance your mortgage, though it could take more time depending on various factors. For example, third-party appraisals and inspections can slow down the process.

What credit score do I need to refinance?

Most lenders require a minimum credit score of 620 to qualify for a refinance, though FHA loans may accept a credit score as low as 500. However, borrowers with excellent credit will qualify for the lowest interest rates and best loan terms. 

The Bottom Line

Refinancing your mortgage doesn’t have to be a difficult and time-consuming process, and taking the refinance advice outlined in this article can make the process easier. 

Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider and Bankrate.

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