How to Refinance a Home Mortgage

by Brandon Cornett

Article Summary: The process of refinancing a home confuses a lot of homeowners. They suspect it might be a smart move, but they don't know how to go about it. So in this article, I'll explain how to refinance your home mortgage loan in step-by-step fashion.

Refinancing is a hot topic among homeowners right now. There are two primary reasons for this. For one thing, interest rates have dropped, and that always gets people in a refi state of mind. There are also a lot of people with risky ARM loans right now, and many of them want to refinance into a more affordable (and safer) fixed-rate loan.

Regardless of why you're interested in refinancing, you'll need to understand the steps involved in the process. In fact, once you go through some of the preliminary steps (such as weighing the cost against the gain), you might find out that a refi doesn't make sense right now. But it all starts by learning the process involved.

How to Refinance — By the Numbers

Before we get started, let me get some standard disclaimers out of the way. The process of refinancing a home will vary slightly from one homeowner to the next. Some people face fewer obstacles while others encounter more, and so on. But with that being said, most people go through the following series of events. Here's how to refinance your home loan wisely.

Step 1: Background Research

Determine if you can even refinance your home in the first place. Find out the balance of your existing loan, and try to determine the current value of your home. You can get a rough idea of your home's value through some of websites designed for this purpose, such as HouseValues.com.

Many lenders require that you have at least 20% equity (ownership) in your home in order to refinance. This is a problem for a lot of people these days, because house values have dropped in many areas. And if you owe more than your home is worth in the current market (i.e. you are "upside down"), then you won't be able to refinance.

If you haven't reviewed your credit reports and checked your credit score in a while, it may be a good idea to do that as well. A lesson on how to refinance a mortgage is only complete when it touches on the subject of good credit. This has always been important, but it's even more important after the economic crisis we have suffered. Lenders are stricter these days. You may even find that you need to improve your score before refinancing.

Step 2: Apply for a Quote

Moving right along in our lesson on how to refinance your home loan, you are now ready to apply for a mortgage. You've got to do it sooner or later, right? You can even get started through the Online Quotes section of our website.

Be prepared to provide the usual documents, such as your proof of income, tax returns for the last two years, bank statements and other records of assets. The best way to understand how to refinance a mortgage is to think back to when you applied for your original home loan. Much of the process is the same, and that goes for this paperwork shuffle as well.

Your lender will pre-approve you (ideally) based on your credit score, your debt-to-income ratio, and the amount of equity you have in the home. Of course, their final approval will be contingent upon the home appraisal, which is covered below.

You can learn more about online mortgage quotes in this article:
www.cornettcommunications.com/mortgage-quotes.php

Step 3: Review the Offer

When learning how to refinance a home mortgage loan, it's critical that you understand the concept of the break even point, or BEP. This is the next step in your process, and it will help you determine whether or not it's a good idea to move forward. Basically, you want to make sure the refinance is beneficial to you. In other words, you need to ensure that the money you save over the life of the new loan exceeds the amount you pay to refinance (in closing costs). This is known as the break even point, and you can learn more about it in this article on the cost of refinancing.

Some states (but not all) prohibit mortgage lenders from offering refinance loans when it doesn't benefit the borrower — i.e., when the borrower ends up paying more in the long run. This is a good law for consumer protection, but to my knowledge it does not exist in every state. So do your own homework based on the information the lender gives you in their offer. The two most important items are the interest rate they offer you, and the estimated closing costs.

Step 4: The Home Appraisal

The mortgage lender will send a home appraiser out to determine the value of your property. The appraiser will use recent comparable sales in your are to come up with this value. This will determine the amount you are able to borrow. Homeowners with a lot of equity in their homes will sometimes use the excess to pay off other debts (by rolling their other debts into the refinance).

Step 5: The Final Stretch

Continuing our lesson on how to refinance your mortgage loan, we have now reached the homestretch. If the lender determines that the value of your home is enough to fulfill the conditions of their offer, they will proceed to the title work, working with your current lender to arrange the payoff, etc. If everything goes smoothly, they will schedule your closing process.

Conclusion and Going Forward

This article gives you a good overview of how to refinance your home successfully. But your research should not end here. I recommend you read a few more articles and tutorials on this subject until you understand it inside and out. Then you're ready to move forward in the process.

Find out how much you owe on your current mortgage. Get a ballpark idea of what your home is worth. Contact a lender to apply for a refi loan — you can do this online to save time. Once you get an offer from a lender, do the math to make sure it's financially beneficial for you (remember the "break even point"). Those are the basic steps involved in the process. Now you know how to go about it ... the only thing left is taking the first step.

Related article: Reasons to Refinance