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How to refinance your mortgage

How to refinance your mortgage
(Image credit: ShutterStock)

Refinancing your mortgage can be a sound financial investment into your future. It allows you to potentially pay lower interest rates, convert some of your home equity into cash, or adjust your payments to suit your lifestyle. The benefits you get from refinancing your mortgage will entirely depend on your personal and financial goals and the service provider you use to achieve these goals. 

Before you head out into the mortgage refinance online landscape it’s important to remember that not all financial institutions and mortgage refinance companies are created equal. You will need to do some research before you start. To help you build a fast and efficient shortlist, we’ve already spent 100s of hours researching the best refinancing mortgage companies to find out what paperwork they need, how long they take, and what other customers think. This is a great place to kickstart your refinance journey.

Now, to get the most from your refinance, you need to know how it works, what options exist, and what decisions you need to make. It’s incredibly important to have a clear understanding of the process and what’s expected of you, otherwise you may end up paying more than you planned for less than you needed.

Mortgage refinance fees and interest rates

When you decide to refinance your mortgage, you’re essentially replacing an old mortgage with a new one. It’s that simple, and that complex. You may have bought your home under very different financial conditions which means you may have a much higher interest rate, or you may want to move from a fixed interest rate to an adjustable-rate mortgage (you can go the other way too, from fixed rate to adjustable-rate). You can even use this process to gain access to funds that will allow you to pay off debts, invest your money, or purchase something that requires a big down payment. Regardless of your needs, mortgage refinance can potentially make your life a lot easier.

However, you will pay for the privilege. When you refinance your mortgage, dependent on the company you choose to work with, you can pay anything from 3-6% of the loan amount in fees plus additional costs around the appraisal process, application fees, and more. 

The types of fees you have to pay will vary. Some companies, like Flagstar Mortgage, have excellent digital application tools and a solid reputation, but high fees that include an origination fee, underwriting fee, processing fee, and a closing transaction fee. Others, like SoFi, are entirely digital which means fewer fees but limitations when it comes to customer engagement and face to face support. You may also have to pay for mortgage insurance on top of all the other fees if your deposit or application doesn’t fit specific criteria. Again, these will depend on the company you choose to work with.

One of the best reasons for refinancing is to reduce your interest rate and therefore your monthly expenditure. If you can get a quote that drops your interest by even half a percentage point (with any new monthly fees taken into consideration), then it’s worth looking into it.

Mortgage refinance paperwork

The first step to preparing your life for the fairly lengthy mortgage refinance process is to do a full financial audit of your existing bills, home value and lifestyle. You need to do this for two reasons – the first is to ensure that you’re not wasting your time on an application that will end up being a false economy, the second is to ultimately prepare your paperwork for your application. 

While you’re doing this audit, you can get together paperwork around your credit score, your financial history, employment history, and your insurance. The type of paperwork that your bank or refinance company will ask for will entirely depend on your status, credit score and their due diligence. You might find our how to improve your credit score feature useful if you've been struggling to manage your finances. 

The following list is not exhaustive, but covers most of the admin that you’ll need to gather for your mortgage refinance. 

  • Employment records 
  • Proof of income
  • Tax returns such as your W-2s and your 1099s
  • Bank statements
  • Asset and liability statements and letters
  • Homeowner’s insurance certification
  • Title insurance
  • A list of debts including cars, credit cards, and loans
  • A recent appraisal on the value of the home
  • Identity forms

If you want an even more comprehensive list, take a look at the Refinancing Application Checklist provide by Wells Fargo, it’s probably one of the longest.

It’s at this point you should also take a good look at your credit score. This is instrumental in getting you a superb loan and a great deal. A relatively low credit score is acceptable to some mortgage refinance providers, like Reali, but most companies prefer a high credit score and a solid financial foundation. If your score is low, spend some time building it up as this will really help you in the long term.

While you’re doing your financial audit, you’re going to also need to work out your home equity. This is defined as the value of your home over and above what you already owe the bank. You can work out your home equity by following this clearly explained guide by the Bank of America (one of the more reputable and recommended refinance mortgage providers).  Once you’ve worked this out, you will also have some solid ammunition to use in your application. Remember, the higher your equity, the better a proposition you are to your chosen lender. 

Mortgage refinance tools

In addition to the lists and guides above, most mortgage refinance companies offer you a variety of tools to help you do the math and make the right decisions. Use their free mortgage refinance calculators to work out your best offer – once you’ve done all your paperwork, you’ll have a good idea of your figures so this will be a close estimate of your final fees and rates. Do this for every one of your shortlisted mortgage refinance providers so you get the best possible deal. 

Once you’ve found the deal you like, lock that lender into place! Contact them, get the interest rate that you’ve been quoted on paper, and close the loan. You will likely find this last phase relatively painless as you’ve already done the hard work earlier on. Just make sure you are ready to pay cash for any extra fees (don’t put them on your loan as they’ll only accrue interest) and have all your paperwork to hand. Then, sit back and reap the rewards of your hard work.

Yes, getting your mortgage refinanced is a complex and lengthy process, but it can really be worth it for your finances in the long term. 

If you're looking to get on the property ladder, make sure you check out our guide to the best mortgage lenders