As you pay down your mortgage, you may reach a point where refinancing becomes a sensible option. Whether you want to lower your monthly payment, reduce your interest rate, or access your home’s equity, refinancing can help you realign your loan with your financial goals. This guide walks you through the process of refinancing, what to consider, and how to get started.
What is Mortgage Refinancing?
Refinancing means replacing your current mortgage with a new one that has different terms and conditions. The new loan pays off the old one, leaving you with a single monthly payment and a fresh set of conditions. Homeowners often refinance to:
- Lower their interest rate
- Reduce monthly payments
- Change the loan term
- Switch from an adjustable-rate to a fixed-rate mortgage
- Access equity through a cash-out refinance
Refinancing can also help remove or add someone to the mortgage or change loan types, such as moving from an FHA loan to a conventional loan.
Reasons to Consider Refinancing
Lower Your Interest Rate
If market rates have dropped or your credit score has improved, refinancing could help you secure a lower interest rate. Even a small reduction may result in substantial savings over the life of the loan.
Change Your Loan Term
You can refinance to a longer term to reduce your monthly payment or to a shorter term to pay off your home faster and save on interest.
Switch Your Loan Type
If you started with an adjustable-rate mortgage, refinancing to a fixed-rate loan can give you more predictable monthly payments. You can also refinance from an FHA loan to a conventional loan to eliminate mortgage insurance premiums if you have enough equity.
Tap Into Your Home’s Equity
A cash-out refinance allows you to borrow more than you owe and take the difference in cash. This can be used for renovations, debt consolidation, or other major expenses. Just keep in mind that it increases your loan balance and monthly payment.
How to Refinance Your Mortgage: Step by Step
Step 1: Choose Your Refinance Type
Determine which type of refinance best suits your goals. Common options include:
- Rate-and-term refinance to adjust your interest rate or loan term
- Cash-out refinance to access equity
- Cash-in refinance to pay down your loan and reduce your balance
- No-closing-cost refinance to roll fees into the loan
- FHA Streamline refinance for those with FHA loans
Step 2: Review Your Current Loan
Know your interest rate, loan balance, and monthly payment. This helps you compare offers and calculate potential savings.
Step 3: Check Your Credit Score
Your credit score affects the rate you qualify for. A higher score can unlock better terms. If your score has improved since you got your original mortgage, refinancing may be especially beneficial.
Step 4: Estimate Your Home’s Value
Your home’s value impacts your loan-to-value ratio. You can use online tools for a rough estimate, but your lender may require a formal appraisal.
Step 5: Calculate Your Break-Even Point
Refinancing comes with closing costs, usually between 2 and 5 percent of the loan amount. Your break-even point is when your monthly savings exceed those costs. If you plan to stay in your home beyond that point, refinancing may be a smart move.
Step 6: Gather Your Documents
Be prepared to provide:
- Pay stubs
- Tax returns or W-2s
- Bank statements
- Homeowners insurance proof
- Mortgage statement
- Property tax bill
Step 7: Apply for the Loan
Submit your application and provide the required documents. Your lender will review your financial profile and may order an appraisal to assess your property's value. Working with a lender has many benefits; read more here!
Step 8: Lock Your Rate
Once approved, you can lock in your interest rate to protect against market changes. Rate locks typically last 30 to 60 days.
Step 9: Close on Your New Loan
At closing, you will sign final paperwork, pay any closing costs, and officially replace your old mortgage with the new one. Your new loan terms begin immediately.
Refinancing your mortgage can be a powerful way to improve your financial outlook. Whether you want to save money, pay off your home faster, or access equity, the key is choosing the right loan and working with a lender you trust. Our team is here to guide you through every step, making the process simple and efficient.
Ready to refinance?
Explore your options with SWBC Mortgage and take the next step toward a smarter home loan.
Refinancing an existing loan may result in higher total finance charges over the life of the loan. Debt consolidation does not pay off debt and may result in a higher long-term expense.