Mortgage rates have risen considerably recently, from an average of 2.96% for a 30-year fixed-rate loan at the end of 2021 to around 6% to 7% at the midpoint of 2023. But despite it being more expensive to borrow money for a home, refinancing is still an attractive option for many homeowners. It allows you to replace your current mortgage with a new, potentially more advantageous one.
Perhaps you decided that you’d like to change your loan term, or you received a windfall you’d like to put toward lowering your mortgage ASAP. Another possibility is that you’ve built up equity and would like to tap it in a cash-out refinance.
Whatever your situation may be, here’s what you need to know about refinancing a home mortgage loan, from whether it’s right for you to what steps are involved to how much it will cost.
What Is Mortgage Refinancing?
Mortgage refinancing occurs when you replace one home loan with a new one. You might do so for such reasons as:
• To get a different loan term (say, 15 years instead of 30, or vice versa)
• To get a better interest rate
• To tap your home equity
• To make a switch between a fixed- and adjustable-rate loan
• To get rid of mortgage insurance on an FHA loan.
You need to go through the loan application process, underwriting, and closing again and pay the related costs. The new loan will pay off the old one. Then, going forward, you pay the new lender every month instead of your previous one.
Mortgage Refinancing Costs
Refinancing will generally cost from 2% to 5% of your loan’s principal value in closing costs. That’s a significant range, so it can be wise to shop around to make sure you’re getting the best deal.
Since you’re essentially applying for a new loan, you will likely need a chunk of cash at the ready if you choose to refinance. For this reason, it’s important to consider those refinancing costs compared to the potential savings. A good rule of thumb is to be certain you can recoup the cost of the refinance in two to three years — which means you shouldn’t have immediate plans to move.
There are helpful online calculators for determining approximate costs for a mortgage refinance. Of course, this will only be an estimate, and each lender will be different. As you do your research, lenders can provide final closing cost information alongside a quote for your new mortgage rate.
When you refinance, you also have to consider closing costs. Some lenders may not have origination fees, but instead charge the borrower a higher interest rate.
If you have a history of managing credit well and a strong financial position, there are some mortgage refinancing lenders that will probably reward you by offering a better rate than they would charge those with lesser credentials.
Recommended: Home Affordability Calculator
How Long Does a Mortgage Refinance Take?
The process can take anywhere from 30 to 45 days or longer to complete. Factors that impact timing include the complexity of the loan, your ability to submit materials in a timely fashion, and the efficiency of the lender and/or broker.
If you want the process to move quickly, you may want to look for mortgage lenders who offer more streamlined service and a better customer experience. This may mean working with an online lender versus, say, a brick-and-mortar bank.
How to Refinance a Home Mortgage Loan
When you refinance a home mortgage, you are essentially repeating the same process as when you originally bought your property. This time, however, instead of the loan going to the homeowner you are buying a house from, funds will first go to the financial institution that holds your current mortgage. Once that loan is paid off, your newly refinanced loan kicks in. You start making payments to the new lender.
Because you are replacing one mortgage with another, you can expect the steps to be similar as they were when you got your original loan, from shopping around for the best loan for your situation to providing the necessary documentation to closing.
Steps in the Mortgage Refinancing Process
Here’s a closer look at the process:
1. Determine your goal. The first (and arguably most important) step is to determine what you want to get out of your mortgage loan refinance. There are several mortgage refinance types, but “rate and term” and “cash-out” are the two most common.
Just as the name implies, a “rate and term” refinance updates the interest rate, the term (or duration) of the loan, or both. You can also switch between an adjustable- vs. a fixed-rate loan.
It is important to understand that not every refinance will save you money on interest. For example, if you extend the loan term from 15 to 30 years, you may lower your monthly payment, but you could end up paying more money in interest over the course of your loan.
Once you determine your goal, your primary focus will be determining whether the fees are worth what you’ll gain.
With a cash-out refinance, you are using increased equity in your home to take out additional money on your mortgage.
This is usually done to fund common home repairs or pay off other, higher-interest debt. While this kind of loan can be an excellent tool if you use it wisely, as with all loans, it’s rarely advisable to take out more than you absolutely need.
2. Check your credit score and credit history for errors. Your credit score is an important factor in determining whether you get a better rate. Make sure you take time to clear up anything that’s been reported erroneously on your credit report. You might also want to remedy, say, an unpaid bill that was forwarded to a collection agency. These are factors that can lower your score.
3. Research your home’s approximate value. Check comparable sale prices — not just listing prices — in your neighborhood to get an idea of what your house is worth. If the value of your home has gone up significantly and improves your loan-to-value ratio (LTV), this will be helpful in securing the best refinancing rate.
4. Compare refinance rates online. It’s wise to shop around and see what at least a few lenders offer. Don’t forget to ask about all costs involved. Most financial institutions should be able to give you an estimate, but the accuracy can depend on how well you know your credit score and LTV ratio.
5. Get your paperwork together. The process will move faster if you have your pay stubs, bank statements, tax filings, and other pertinent financial information ready to go.
6. Have cash on hand. Refinancing brings charges, and at closing, such items as overdue property taxes can need to be paid, too. Make sure you can cover these costs.
7. Track the lender’s progress. Once the process is underway, keep an eye on how well things are moving ahead. What typically happens: The lender will likely send an appraiser for a home inspection. After the loan documentation and appraisal are submitted, loan officers determine the interest rate and create the loan closing documents. The closing is then scheduled with the refinancing company, mortgage broker, and your attorney.
Reasons to Refinance
As mentioned above, there are several typical reasons to refinance:
• Reducing your monthly payment
• Paying off your loan sooner
• Changing the loan terms or type (fixed- vs. adjustable-rate)
• Tapping your home equity
• Eliminating mortgage insurance on an FHA loan.
Benefits of Refinancing
By refinancing your home loan, your monthly mortgage payments might be reduced. This in turn could free up money in your budget to go toward other goals, like paying down credit card debt or pumping up your emergency fund.
In addition, you might pay off your loan sooner, which could save you a considerable amount in interest over the life of the loan.
Refinancing your mortgage might also allow you to tap equity in your home. This could be useful if, say, you need those funds for educational or other expenses coming your way.
Also, some people who switch from an adjustable- to a fixed-rate loan may feel more secure with a set, unwavering payment schedule.
Recommended: First-Time Homebuyer Programs
Tips to Refinance a Mortgage
Beyond the tips mentioned above, you may also benefit from keeping these points in mind:
• Think carefully about no-closing-cost loans. Yes, not paying closing costs can sound appealing, but there’s a good chance you will wind up with a higher interest rate and paying more over the life of the loan.
• Make your appraisal a success. It can be distressing to have an appraisal come in low and throw a wrench into the works as you try to refinance. If there’s a glaring issue (rotting porch posts, for instance), it might be wise to fix it before the appraiser visits.
• Prioritize requests for paperwork and documentation when your file is moving through underwriting. Not doing so can cause the process to drag on for longer than anyone might want.
The Takeaway
Depending on your financial situation and goals, refinancing your home loan can be a wise move. You may be able to lower your monthly payments, or you might shorten your loan term, thereby saving a considerable amount in interest. Another reason to refinance: To tap the equity you have built up in your home and use that cash elsewhere. The process is very similar to shopping for, applying for, and closing on your current mortgage. It will involve doing your research, providing documentation, and paying closing costs.
If refinancing is right for you, see what SoFi offers. With a SoFi Mortgage Refinance, you’ll find competitive rates, flexible terms, and a streamlined process, all of which can help you find just the right loan for your life.
FAQ
What is the average refinance fee?
Typically, you can expect to pay between 2% to 5% of the loan’s principal in closing costs when refinancing a mortgage.
Is it expensive to refinance?
The cost of refinancing will typically vary with the amount of the loan you are seeking. If closing costs are, say, 3.5% of the loan principal, that will be $3,500 on a $100K loan and $35,000 on a $1 million loan. It can also be helpful to compare these closing costs to the benefits of refinancing. For instance, you might free up more money every month to pay down pricey credit card debt, or you might shorten your loan term and pay less interest over the life of the loan when refinancing.
Why is it so expensive to refinance a mortgage?
When you refinance a loan, you are replacing your current loan with a new one. Closing costs are assessed to cover the expenses involved, including appraisal fees and other charges.
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