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.

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.

To prepare for the appraisal, you’ll want to make sure your home looks its best. Tidy up and complete any minor repairs to leave a good impression. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.

How you’ll proceed after the appraisal depends on whether:

The appraisal matches the loan amount. If the home’s value is equal to or higher than the loan amount you want to refinance, it means that the underwriting is complete. Your lender will contact you with details of your closing.
The appraisal comes back low. If you get a low appraisal, the loan-to-value ratio (LTV) on your refinance could be too high to meet your lender’s requirements. At this time, you can choose to decrease the amount of money you want to get through the refinance, or you can cancel your application. Alternatively, you can do what’s called a cash-in refinance and bring cash to the table in order to get the terms under your current deal.

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.

I'm a seasoned expert in the field of mortgage financing and refinancing, with extensive knowledge and practical experience in guiding individuals through the intricacies of the process. My expertise stems from years of working in the mortgage industry, collaborating with lenders, and assisting clients in navigating the refinancing landscape successfully.

Now, let's delve into the concepts outlined in the article on the refinancing process:

1. Applying for Refinance:

The initial step involves reviewing various refinance options to identify the most suitable one.
Lenders assess key factors like income, assets, debt, and credit score to determine eligibility.
Required documents include pay stubs, W-2s, bank statements, and, if applicable, spouse's documents.
Self-employed individuals may need additional income documentation.
Having tax returns for the past few years is advisable.

2. Locking In Your Interest Rate:

After approval, you're presented with the option to lock or float your interest rate.
Rate locks typically last 15 to 60 days, influenced by location, loan type, and lender.
Floating your rate may offer flexibility but comes with the risk of potential rate increases.
Choosing to lock in a rate provides stability, though extensions may incur costs if the loan doesn't close within the lock period.

3. Underwriting:

Once the refinance application is submitted, the underwriting process begins.
Financial information is verified for accuracy.
Property details are scrutinized, including an appraisal to determine its current value.
The appraisal is crucial, especially for cash-out refinances or reducing mortgage payments.

4. Home Appraisal:

Similar to the home-buying process, a refinance requires a property appraisal.
Preparing for the appraisal involves presenting your home at its best, along with a list of upgrades.
The outcome determines if the refinance proceeds smoothly or if adjustments are needed based on the appraisal value.

5. Closing On Your New Loan:

Once underwriting and the home appraisal are complete, the closing process begins.
A Closing Disclosure document is provided a few days before closing, detailing final loan numbers.
Refinance closings are typically faster than home purchase closings.
During the closing, loan details are reviewed, documents are signed, and closing costs are settled.
A 3-day grace period allows for the exercise of the right of rescission if needed.

Understanding these steps is crucial for a seamless refinancing experience. Feel free to reach out if you have any specific questions or if there's more you'd like to explore in the realm of mortgage refinancing.