So, you want to refinance your home loan. There are a lot of great benefits a refi can offer—lower rates, shorter terms, cash out of your equity, and more. In order to get the benefits you want from your refinance, it’s important to go into the process prepared. To help you get started, we rounded up our top ten tips for refinancing a home loan.
10 Tips for Refinancing a Home Loan
- Calculate your savings
- Consider your home equity
- Make a plan to pay off your loan
- Get to know the refinance process
- Get multiple refinance quotes
- Do the math before deciding to buy down your rate
- Factor fees and closing costs into your refinance budget
- Read your closing documents carefully
- Find small ways to cut costs
- Weigh the pros and cons of staying with your current lender or getting a new one
1. Calculate your savings
Will refinancing a home loan actually save you money? A simple budgeting tip for refinancing your home loan is to use a refinance calculator. It factors in your original loan amount, APR, and term; your new loan amount, APR, and term; and various fees associated with the transaction to come up with an estimated new monthly payment and savings. The right calculator can help you shop for the right loan, give you a good idea of what to expect, and calculate how long it might take you to recover from the costs of refinancing. Doing your own research can be beneficial, but keep in mind this is an estimate. You’ll have a better idea of your real payment and costs once you get in touch with a loan originator.
Pro Tip: Many Borrowers tend to think refinancing is all about the rate, but we recommend focusing on your savings (or, for cash-out refinances, the amount of equity you’re tapping into).
2. Consider your home equity
No matter your refinance goals, your home equity is key to reaching them. The more equity you have in your home, the easier it is to refinance. With the exception of a few loan programs, most lenders will verify that you have at least a small amount of equity in order to refinance. That doesn’t mean a lack of equity should keep you from applying though! There are loan programs, like the FHA Streamline refinance, that are built especially for homeowners with little to no equity in their homes. Ask your loan originator about refinancing options for homeowners with low equity if you think you’ll have trouble refinancing.
3. Make a plan to pay off your loan
Once you’ve decided that refinancing is a financially wise decision, it’s time to sit down and figure out how you’ll pay back the loan. Your long-term mortgage plans aren’t just about your rate. Talk with your financial advisor and come up with a plan to pay off the loan that leaves room for your other living expenses. Don’t rely on unpredictable income like tax refunds or employment bonuses to reach your payment goals. You can still use these to make additional payments, just think of them as a “nice to have” in your plan rather than essential.
4. Get to know the refinance process
Refinancing can be a quicker process than a home purchase, especially if you get a streamline refi. However, most of the steps of the process still apply. You’ll want to consult your loan originator before you take out a line of credit, change jobs, transfer large sums of money, or make any other major financial decisions.
Pro Tip: Watch this video for an overview of the refi process.
5. Get multiple refinance quotes
Don’t be afraid to chat with a few different mortgage lenders and get a loan estimate from everyone you talk to. A loan estimate outlines the offer the lender is willing to make in detail, which allows you to make a clear comparison between offers so you can more easily decide which lender to choose.
6. Do the math before you decide to buy down your rate
These days, the average time an individual owns their home is often shorter than the time it would take them to recuperate the closing costs. If you choose to buy down your rate, there are many tools available online that can help you do the math. And, as always, your loan originator should be able to calculate this for you over the phone, so consider giving them a call.
7. Factor fees and closing costs into your refinance budget
When you’re refinancing a home loan, you have to pay many of the same fees you would with a home purchase. Property taxes, homeowners insurance, and closing costs are just a few of these fees. Make sure you set aside some money to cover these expenses at closing.
8. Read your closing documents carefully
Don’t just sign your closing documents—review them carefully. After all the moving parts of the refinance process have settled, it’s possible that there may be a mistake or two on your closing documents. Mortgage lenders are legally required to give you a closing disclosure before you reach the closing table. Take the opportunity to make sure these documents represent the offer you agreed upon at the beginning of the refinance process.
9. Find small ways to cut costs
When it comes to lowering your refinance costs, every little bit helps. So, one of the most timeless tips for refinancing a home loan is to look for small ways to cut costs. For example, some lenders allow lower monthly payments when you opt-in to auto-pay instead of paying manually each month. Other potential ways to save could include:
- Timing your refi to the market. When rates are low, take advantage!
- Getting a streamline refi to avoid appraisal fees
- Avoid big purchases before applying to keep your credit score where you want it
10. Weigh the pros and cons of staying with your current lender or getting a new one
Deciding whether to stick with your lender or choose a new one for your refinance is up to you. On one hand, a new lender might be more incentivized to offer you lower rates. On the other hand, sticking with your current lender means they already have all your mortgage history available, which can help you speed up the process. And if you’ve taken out an FHA or VA loan and plan to refinance to the same loan type, your current lender can help you streamline your refi. This typically means less paperwork, no appraisal required, and faster turn times.
If all this sounds like a lot to consider, don’t worry! You made it through purchasing a home, and your refinance is within reach, too. And if you have any questions or concerns, we’re here to help.