Refinance Your Home to Save Money or Get Cash

Know how refinancing can help you reduce monthly payments or use equity

What Is Home Refinancing?

When you buy a home, you take out a mortgage — a loan used to buy a house. Refinancing is the process of taking out a new mortgage to replace the first one. This is done to obtain more favorable terms — such as a lower interest rate or a shorter loan term.

You could refinance with the lender that funded your initial home loan, or you could opt to go with a new lender. Comparing lenders can help you get the best rates on a home refinance loan.

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Refinance Options

Rate-and-term or cash-out refinance

Loan Terms

15-year or 30-year term

Loan Rates

Fixed or adjustable

How Does Home Refinancing Work?

Home refinancing typically goes through the following steps.

  1. Preparation. Learn about the refinance process and compare lenders to secure a desirable interest rate.
  2. Application. To apply for a refinance, you will submit information about your current mortgage as well as your income, credit, employment, proof of homeowners insurance and assets.
  3. Appraisal. Your lender will likely request that your property be appraised. You may be able to avoid an appraisal based on your current mortgage or the refinance loan you’re seeking.
  4. Underwriting. An underwriter will have to evaluate your application and confirm whether you are eligible for a loan.
  5. Closing. Expect to sift through and sign on a large stack of paperwork, including a promissory note, deed of trust and initial escrow disclosure.

Be aware that federal law gives you the “right of rescission” when you refinance a mortgage. This means that, up to three days after you sign the closing documents, you can provide your lender written notice to cancel the refinance if you change your mind about it. 

Refinance Without Appraisal

The Federal Housing Administration (FHA), the U.S. Department of Veteran Affairs (VA), and the U.S. Department of Agriculture (USDA) offer streamlined refinance programs that allow borrowers to forgo an appraisal. These programs don’t allow you to take cash out, but feature relaxed qualification standards.

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Determine Home Value Before You Refinance

Before you refinance, you need to know how much your home is worth and how much you can borrow. Read the following steps to get ready.

Determine Your Equity

If you have little or no equity in your home — or if your home is underwater, meaning you owe more on it than what it is worth — you may have difficulty refinancing with a conventional loan. Some government programs are designed to help homeowners with low equity, such as HARP.

Check Your Credit Score

The better your credit is, the more likely you are to qualify for a refinance. You also may be able to get a better interest rate. Check your credit score before you apply for a home refinance.

Research Lenders

Do some research and find a lender that can help with your specific refinancing needs.

Prepare for Appraisal

Getting your home appraised at a higher value can be beneficial, because it decreases the loan-to-value ratio (LTV) of your loan.

Crunch the Numbers

Although refinancing often can save you money, that isn’t always the case. Sometimes, you’ll find that the reduced interest rate doesn’t make up for the cost and hassle of refinancing your mortgage.

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How to Improve Your Credit Score?

Credit Report

If your score is low, take time to improve your score before you apply for a home refinance. Obtain copies of your credit report from the three major credit reporting bureaus, and report any errors on them. If errors are disputed successfully, your credit score may get a boost.

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When to Refinance a House

Refinancing your home makes the most sense under certain circumstances.

  •  Interest rates are lower than when you originally took out your mortgage and if rates are expected to rise.
  •  Your credit score has improved, which could help you get a lower rate.
  •  Your mortgage is underwater. You may be eligible for some government programs.
  •  You want to tap your equity to pay off high-interest debt or make a major purchase.
  •  You have an adjustable-rate mortgage and want to get a fixed-rate mortgage.

Am I Eligible for HARP?

The federal Home Affordable Refinance Program (HARP) caters to borrowers with a loan-to-value ratio (LTV) equal to or greater than 80 percent, and with limited delinquencies over the 12 months before seeking refinancing. It can help homeowners reduce their monthly payments.

HARP is a voluntary program, meaning lenders don’t have to participate in it. There are, however, basic qualifications a homeowner must meet in order to be considered for a HARP refinance.

  •   You must be current on your mortgage. That means you must not be 30 or more days late making a payment in the last six months, and have no more than one such late payment in the past year.
  •   The home you are refinancing must be your primary residence, a one-unit second home, or a one- to four-unit investment property.
  •   Your mortgage must be carried by Freddie Mac or Fannie Mae.
  •   Your loan must have been originated on or before May 31, 2009.
  •   Your LTV ratio must be more than 80 percent.

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What Is HARP?

The Home Affordable Refinance Program is a federal program designed to help people who have little equity in their home or whose mortgages are underwater — meaning their home is worth less than what they still owe on it — to refinance the loan, which they wouldn’t otherwise be able to do.

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Home Refinance Rates

How are home refinance rates calculated? Several factors that determine the rates you will be offered on a refinance.

Credit

Your credit has an impact on what interest rate you will be offered. Check your credit score and obtain copies of your credit report. See if there’s anything you can do to improve your score, and report any errors to the three major credit reporting bureaus.

Equity

The more equity you have in your house, the greater the likelihood you will get a better rate on your new loan. If you have some extra cash before you refinance, you may consider paying down part of your mortgage before applying for a refinance to see if it can help you secure a better interest rate.

Debt

High debt can negatively impact your debt-to-income ratio, one of the main factors used to determine your creditworthiness. Paying off debts can improve your credit and help you secure a more favorable interest rate.

What Is a Refinance Cash-Out Loan?

A refinance cash-out, also known as a cash-out refinance, allows homeowners to refinance their mortgages for more than the amount of the original loan, and receive the difference between the two amounts in cash. The money then can be used for a variety of purposes. A refinance cash-out usually doesn’t make sense unless you’re refinancing into a lower interest rate.

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Different Types of Refinancing

Refinancing your home loan can be done in various ways, which meet your needs and priorities.

  • Government refinancing. These are loans from the Federal Housing Administration, U.S. Department of Veteran Affairs, or the U.S. Department of Agriculture. It also can include the Home Affordable Refinance Program, or HARP.
  • Conventional refinancing. A conventional loan is any loan not insured or guaranteed by the federal government, including those that adhere to the standards of Fannie Mae and Freddie Mac. Many Fannie and Freddie loans are eligible for the HARP refinance program.
  • Cash-out refinancing. Cash-out refinances allow homeowners to refinance their mortgage for more than the amount of the original loan, and receive the difference between the two amounts as cash payment.
  • Cash-in refinancing. This is where you pay down your mortgage enough to reduce your LTV, allowing you to refinance and obtain a smaller monthly payment.
  • Short refinancing. Short refinances are rare, but may be available as an alternative to a short sale or foreclosure. In a short refinance, the lender pays off the existing mortgage, allowing the borrower to take out a smaller, more affordable loan. This allows the borrower and lender to avoid foreclosure proceedings, which can be costly for both parties.

Home Refinance Costs

Although the ultimate goal of refinancing is usually to lower the interest rate or to reduce your monthly mortgage payment, refinancing comes with a wealth of costs homeowners should consider carefully.

  • Mortgage application fee. When you submit an application, lenders will charge you an application fee, which could cost as much as $500.
  • Appraisal. A refinance appraisal can cost $300 or more. The total cost depends largely on the complexity of inspecting the property.
  • Origination fee. It is a fee, typically up to 2 percent of the total loan amount, paid to the mortgage broker.
  • Insurance fees. You will keep your homeowners insurance. You will need to take out a new title insurance policy especially if you’re working with a new lender.
  • Taxes and recording fee. The deed on file with your local county must be updated, so you will need to pay a recording fee. You also will owe any applicable taxes.
  • Indirect costs. When you take out a mortgage, the majority of your monthly payment is applied toward interest for about the first half of the loan term. After that, most of your payments go toward paying down the principal, with less getting applied to interest. When you refinance your mortgage, this process resets.

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