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Refinancing your mortgage can be a great way to save money and reach other goals. Some of the steps are the same as when you applied for your original mortgage, such as submitting documentation and going through an appraisal. But many parts of the process are different.
Here are seven tips for navigating the refinancing process — and getting the best deal possible.
1. Know what your refinance goals areWhen you refinance, you have several options for term lengths, interest rates, and types of mortgages. Your decisions will depend on what you want to get out of the refinancing process.
| Goal | Refinance strategy |
| Pay off your mortgage more quickly | Refinance into a shorter-term mortgage |
| Make lower monthly payments | Refinance into a longer-term mortgage, or the same term at a lower interest rate |
| Lock in a lower interest rate | Refinance into a shorter-term mortgage, or the same term at a lower interest rate |
| Get cash for other financial goals | Do a cash-out refinance |
For example, let's say you're 10 years into your 30-year mortgage, so you have 20 years left. Your main goal is to lock in a lower interest rate so you can save money in the long run.
You could refinance into a 20-year mortgage if it comes with a lower interest rate. Or to save even more money, you could refinance into a 15-year mortgage. Shorter terms come with lower rates, and you'll pay interest for five fewer years.
2. Decide which type of refinance you wantOnce you understand your goals, you can move onto deciding which type of refinancing is best for your situation. Here are your options:
| Refinance type | Consider it if you ... | You may qualify if you ... |
| Rate-and-term | Want to do a regular refinance | Have a good financial profile |
| Cash-out | Need cash | Have equity in your home |
| Cash-in | Need to build equity to refinance | Can pay a lot of money at once |
| No-closing-cost | Can't afford closing costs | Can make higher monthly payments |
| Streamline | Don't want an appraisal | Have an FHA, VA, or USDA mortgage |
| FMERR or HIRO | Are underwater on your mortgage | Have a conventional mortgage |
For example, maybe you have an FHA loan and your goal is to get a lower rate — but your home hasn't gained much equity, and your credit score isn't great. In this case, you'll want to do an FHA streamline refinance.
3. Figure out how much equity you have in your homeYour home equity is the relationship between how much your house is worth and how much you still owe on your mortgage. If you owe $100,000 on your mortgage and your home is assessed to be worth $180,000, then you have $80,000 in equity.
It's important to know your equity percentage. An easy way to figure this out is to calculate your loan-to-value ratio, or how much you still owe versus how much your home is worth.
To calculate your LTV ratio, divide the amount owed (in this case, $100,000) by the home value ($180,000). You'll get 0.55, or 55%.
To find your equity percentage, subtract your LTV ratio from 100. When you subtract 55% from 100%, your total is 45%. You have 45% equity in your home.
Many lenders want you to have at least 20% equity, but you may be able to refinance with a lower percentage if you have a great credit score and a low debt-to-income ratio. There are also several ways to increase your home equity before refinancing.
4. Check your credit scoreIf your credit score has remained steady or improved since you got your first mortgage, you could get a good interest rate.
A poor credit score might not keep you from refinancing, though. If you have an FHA, VA, or USDA mortgage, you can streamline refinance into the same type of loan without pulling your credit score.
5. Get quotes from multiple lendersYou can refinance with the same lender you used for your original mortgage, but you don't have to. It's a good idea to get quotes from three or four companies so you can compare interest rates and closing costs.
When comparing quotes, be sure to look at the annual percentage rates (APRs), not just the interest rates. The APR is the interest rate plus the costs of things like discount points and fees. This number is higher than the interest rate and is a more accurate representation of what you'll actually pay on your new mortgage annually.
6. Factor in closing costsJust like when you bought your house, you'll pay closing costs when you refinance. Typical refinancing closing costs are 3% to 6% of your principal, according to the Federal Reserve. That's $3,000 to $6,000 for every $100,000.
After estimating your closing costs, think about whether it will be worth it to refinance. You might not be able to pay that much at once. Or if you move in two or three years, you could spend more on closing costs than you'd save with a new rate.
If you decide refinancing is still worth the costs, you can budget accordingly.
7. Prepare for a home appraisalAn appraiser will assess the value of your home when you refinance so the lender knows your loan-to-value ratio.
The more your home is worth, the better. Consider cleaning the interior and exterior before the appraiser visits, and maybe adding a fresh coat of paint.
If home values in your neighborhood are increasing, you could track down the data and provide the appraiser with a document. Increasing home values nearby usually make your home worth more.
Understanding all your options when you refinance and preparing accordingly can make the process as smooth as possible. It could also save you money in the long run.
Laura Grace Tarpley is an editor at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.
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