If you’re looking to refinance your mortgage, you still need to qualify for the refinance the same way you had to get approved for the original loan. This means submitting an application with a mortgage advisor, going through the underwriting process, and closing on the refinance similar to how you closed on the home loan.
Key takeaways
- What are the first steps to refinancing my mortgage?
- What do I need to know about getting my home reappraised? How much does the home appraisal cost?
- How much equity do I need to have built in my home?
- What is my LTV and how do I calculate it?
- What are the refinance closing costs?
First Steps To Refinancing: Application, Credit Check, Document Collection
The first step to refinancing your home is speaking with a mortgage advisor or lender. Your mortgage advisor should take the time to consult with you about your refinance goals to better understand what you’re looking to accomplish.
From there, you and your mortgage advisor will submit a refinance application, similar to the application you completed when you first obtained a mortgage.
You’ll also need to have your credit pulled again before you can get approved.
If your credit score has dropped significantly since you first purchased your home, this might hurt your chances of getting approved for a refinance.
Similar to how you sent in documents to get approved for a mortgage, you’ll likely need to send in documents to verify your employment, income, and financial situation.
These documents can include your most recent pay stubs, W2s, and bank statements.
In certain cases, you may be able to opt for a “streamline” refinance. This “streamlined” option has a faster approval process and doesn’t require you to provide as many documents
Get Your Home Reappraised
In some cases, the home appraisal may be waived, but oftentimes lenders will require a new appraisal of your home in order to approve you for a refinance.
Property values tend to increase over time, so if you’ve been living in your home a few years, there’s a good chance that it’s gone up in value.
Many homeowners choose to invest in home renovations as a way to increase their property value. While this strategy can definitely pay off in some cases, it’s important to note that simple maintenance and keeping the home in good condition is a major factor that’s often overlooked.
Appraisers will take into account the location, neighborhood amenities, square footage, number bedrooms/bathrooms, foundation, property condition, similar properties that have sold in the last year, and they’ll also be on the lookout for any issues or damage that could detract from the property’s value.
The appraisal fee will be included in your refinance closing costs. Home appraisals can range between $300-$450 or more depending on your market.
Build Up Equity In Your Home
Building equity in your home gives you more refinance options in the future. For example, if you choose to do a cash-out refinance: The more equity you’ve built in your home, the more cash you can take out.
When getting you approved for a refinance, your lender will look at your Loan-To-Value ratio (LTV). Your LTV is an indicator of how much equity you’ve built in your home.
To calculate your LTV, take your loan amount (IE what you currently owe on your mortgage) and divide that by the current value of your home.
For example, let’s say you owe $245,500 on your mortgage, you get your home reappraised, and the current value of your home is $315,000.
In that case, your LTV would be:
$245,500 / $315,000 = 77.9%
The more equity you have, the lower your LTV. In some cases, homeowners won’t qualify for a refinance if their LTV is 80% or higher.
Pay Closing Costs
You’ll need to pay closing costs such as the application fee, lending fees, appraisal, credit check, and title services. The total closing costs for a refinance can vary widely depending on the size of your loan, your state, and other factors.
Generally speaking, refinance closing costs can vary between 2% to 5% of the loan amount or more depending on various factors.
There are a couple ways to get around these costs, though. For example, you can roll these closing costs into your mortgage and pay them over time instead of one lump sum. And in some cases, you may be able to get the lender to cover part of these costs as well.
Talk to your mortgage advisor about these fees and how much you should budget for in closing costs.
Refinance Approval Process Summary
- You still need to qualify for the refinance the same way you had to get approved for the original loan. This means submitting an application with a mortgage advisor, having your credit pulled, and sending in documents to verify your income and financial situation.
- However, you may be able to opt for a “streamline” refinance. This “streamlined” option has a faster approval process and doesn’t require you to provide as many documents.
- Your lender may require you to get your home reappraised. The appraisal fee will be included in your refinance closing costs and can range between $300-$450 or more depending on various factors.
- The more equity you’ve built in your home, the more options you have when it comes to refinancing. In some cases, homeowners won’t qualify for a refinance if their LTV is 80% or higher.
- You’ll need to pay closing costs on your refinance such as the application fee, lending fees, appraisal, credit check, and title services. These costs can vary between 2% to 5% of the loan amount or more.
