How to Refinance a House: A Step-by-Step Guide

Refinancing a home can lower your payments or save money on interest, but it’s not always the right move for everyone.

This mortgage refinance guide will show you each step in the process, plus tips to help you get the best outcome from switching up your home loan.

What does it mean to refinance a house?

When you refinance a house, you’re replacing your existing home loan. You get a new loan, with a new interest rate and terms. The new loan pays off the old balance, and you make payments on the new loan instead. 

There are three main reasons for refinancing:

• Lower rates: Your refinanced loan might have a lower interest rate, which could save you money. 
• Lower payments: Some people refinance to lower their monthly mortgage payments, which frees up room in their budget for other priorities.
• More cash: If you choose a cash-out refinance, you’ll get access to a lump sum of cash you can use to pay down high-interest debt or cover a big expense.

The main benefit of refinancing is the flexibility to choose a new home loan that works better for your current situation. 

Steps to refinance your house

When you’re ready to refinance, these are the steps you’ll need to take:

1. Know where you stand: Check your credit score, credit report, mortgage amount remaining, home value, and current equity. Lenders will want to know this information when you apply. You’ll typically need at least a 620 credit score to refinance, but you’ll be more likely to get a good rate if you have good or excellent credit (670 or higher). You can request your credit report from any of the three major credit bureaus and check your mortgage statement to see the balance of your existing mortgage. There are online tools that can help you estimate the current market value of your house, too.
2. Shop around: The best way to get a good deal on your refinance is to compare multiple lenders and loan offers. Start with at least three different lenders, and compare the interest rate, loan terms, and fees charged by each. Some lenders might have low rates but high fees, or vice versa. You can check rates at each lender individually or use a loan comparison tool to compare multiple lenders at once and get a personalized quote. 
3. Gather documents: You’ll need proof of income and proof of identity to apply for a new mortgage. This typically includes a driver’s license, Social Security number, W-2s for your employer, pay stubs, tax returns, and bank statements. If your lender requires different documentation, the loan officer will let you know. 
4. Fill out an application: With documents in hand, fill out an application with the lender you chose. Many lenders offer online applications, but you may be able to apply in person or over the phone as well. 
5. Prepare for the appraisal and underwriting: After your application is received, the lender will begin the underwriting process, which verifies your financial information. At this point, you’ll need a formal appraisal of your home, which will cost an average of $300 to $500. Many lenders use appraisal management companies to find an independent appraiser. 
6. Close on the new loan: If everything checks out and the lender’s requirements are satisfied, it will work with you to schedule the closing for your refinance, when you’ll sign your paperwork and pay the closing costs. On closing day, you’ll sign your loan documents and complete the refinance.

Costs associated with refinancing

As with a regular purchase mortgage, refinancing a home isn’t free. Closing costs for a refinance will usually run between 3% and 6% of the loan amount, so if you refinance a $400,000 mortgage, you could pay up to $24,000 in additional costs. 

These costs can include: 

• Origination fee
• Discount points
• Title search fee
• Title insurance
• Recording fee
• Appraisal fee
• Mortgage insurance
• Escrow costs
• Notary fees
• Prepayment penalty on your old mortgage (if applicable)

Your closing disclosure will list the fees and costs associated with your new mortgage. Some of the fees might be negotiable, so it’s worth contacting your lender to find out. 

Pros and cons of refinancing your home

Refinancing can be worth it if it saves you money. But there are downsides, too. 

“Mortgage refinancing usually depends on the math comparing potential closing costs with the interest savings from a lower rate,” says Kyle Newell, a Florida-based Certified Financial Planner, “then determining if you will be in the home long enough for that to pay off.” If the costs are too high or your expected time in the home is too short, you might not realize the savings you thought you would. “The best thing to do is to get closing costs from the lender, find the difference in the monthly payment, and run a break-even analysis,” he says.

“Typically, if you plan to be in a home less than three or four years, it probably won’t make sense to refinance,” he says.

Check out: Mortgage Refinance Calculator

Here are some other pros and cons to consider when deciding whether to refinance:

Tips for a successful refinancing experience

Before you get started, make sure you are clear on your goal for the refinance, says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage. 

Is your goal to bring down your monthly payment? “If so, make sure you factor in closing costs and how long you intend to hold on to the property/mortgage to make sure you will be able to actually realize savings,” she says. “Also, keep in mind that the rates you are reading about in the media are typically for a purchase — rates for cash-out refinances are the highest, whereas rate-and-term rates typically fall somewhere in the middle.”

Here are some other tips for making your refinance experience a successful one:

• Clean and declutter your home to prepare for the appraiser.
• Run a break-even analysis to see how long it will take you to break even on the costs of your refinance, and make sure you still plan to be in the home by then.
• Shop around for the best refinance rates for your home and financial situation.
• Wait until rates have fallen at least 1 percentage point below your current rate if you want the refinance to be cost-effective, says D.J. Hunt, a financial planner and CFP based in Melbourne, Florida. If you paid discount points, you might want to wait until the difference is more than 1 point, he said.
• Verify the rate the lender provided you and make sure it’s not a promotional rate, which could go up in six months or a year, Newell says.