Got questions about refinancing your home loan? We’ve asked a panel of home lending experts to provide the answers.

Why Refinance?

mari MARI

To save money or reduce your mortgage risk. There are two ways that can work. If you go from a higher rate to a lower rate, normally that’s going to save money. If you go from a longer maturity to a shorter maturity, that will save you money on interest. You can also go from a floating rate to a fixed rate, which will reduce your risk and uncertainty and can help prevent you from getting into problems like people have in the past.

bill Bill

The number one reason is that people want a lower monthly payment. We see a lot of clients who took out mortgages prior to 2009, and interest rates have come down a lot since then so they would benefit from refinancing and taking advantage of the Home Affordable Refinance Program (HARP), which is still available through September 2017. In addition, if you were to look at interest rates from 14 months ago – in early 2014 – rates are down about three-quarters of a percent. Whether it was a long time ago or even just a little over a year ago that you took out your mortgage, rates have fallen, and that can mean your payment could drop.

lee lee

The main reason people refinance is to reduce their monthly payment and take advantage of lower interest rates. What people should also look at is their monthly payment. If they’re comfortable with that payment, then maybe they should look for a shorter term with the same payment so they can continue paying what they have been comfortable paying but also pay off the mortgage in a much faster timetable.

Is There a General Rule of Thumb for When it Makes Sense to Refinance?

mari MARI

Not really. The old rule was 2 percent — if you could reduce your rate by 2 percent, then it might make sense. But now you can save money with far less than that. Look at how much it will cost you to refinance. If you can pay off those closing costs in a year or two, and you’re going to stay in the house longer than that, it’s a win-win because you’re going to save money within a short period. I would probably look at refinancing if the interest rate difference is about 1 percentage point, but there are exceptions to the rule. For example, for someone who has a floating rate, it might be worthwhile going to a fixed rate even if you’re not saving a lot on the rate itself because you’re getting rid of the rate uncertainty.

bill Bill

The old 2 percent logic doesn’t apply as much anymore because we’re seeing clients across the country who want no-cost refinancing. If you’re paying little to nothing for the refinance, it really becomes a question of whether you can work with a mortgage banker who will understand your situation and figure out what options make the most sense for you and hopefully put you into a lower rate.

lee lee

Look at how long you plan to be in the property and make sure you’ll be there long enough to benefit from whatever the cost is. For example, if you’re going to save $100 a month by refinancing, but it will cost you $2,400 to do the refinance, then you need to be at the property for at least two years before you break even.

Once I Decide to Refinance, Where Do I Start?

mari MARI

Look at your mortgage information and write down the important points. Take out your mortgage documents and ask yourself, “What year did I take this out?”, “What year does it mature?” “What rate am I paying now?” “What is the term?” and “What’s my payment?” It’s always important to know what you are starting with so you can compare what you have and what you can get. It sounds silly but you’d be surprised how many people don’t know that information. They don’t do a good refinance because they don’t know where they’re starting from in the first place.

bill Bill

[Start with] referrals and working with people you trust and who understand your situation. If you just call somebody up and say “What’s your rate?” generally that means “What’s your 30-year, fixed-rate mortgage rate?” But for a client who is 10 years into a mortgage, that [loan] would be a step backward. So start by calling trusted names, people who you think will help you really understand your personal situation and what’s best for you.

lee lee

Call the lender you originally used if you are still happy with them. That sometimes makes it a little simpler because that broker or banker should have copies of some of your previous information and there should be a relationship there.

How Do I Find a Lender to Refinance?

bill Bill

Most people start by going online or by getting a referral from somebody they know. People should probably call a couple of lenders and see who they feel comfortable with and who they think will do the best job for them.

lee lee

I’m not a big fan of shopping on the Internet for interest rates because I find there’s a little bit of discrepancy between actual costs and what you are quoted, or there might be some nuances for your property that might make it a little bit better to deal with someone in a local market. Word of mouth is always good.

How Can I Determine if a Refinance Will Save Me Money?

mari MARI

Here are two things to look at to make sure that you are truly saving money on the refinance and not just lowering your payments while increasing expenses over time. One is how soon you will break even after paying the closing costs. To determine this, look at the closing costs and divide them by the monthly savings. When I just did my own refinance, I found that I would break even and actually start saving money on the payments in 11 months. Since I’m going to be in that house for more than 11 months, I thought that was a pretty good deal. If you run that calculation, however, and discover that the closing costs are so high that you won’t break even or start saving money for six years and you’re only going to live in the house for seven years, then that is probably not a good refinance.

The other thing I like to look at is how much the client is saving in interest over the life of the loan. It’s a little harder to figure out. If you have a financial advisor, ask them, or ask the mortgage professional to calculate it. You can also do the math online with some calculators.

bill Bill

You need to get a trusted adviser — a mortgage banker — who is going to really help you understand your situation. We often find that consumers don’t really know what their absolute interest rate is. They might have a general idea but not everybody knows exactly. So this is where a mortgage banker can pull up their credit report, assess the situation and really walk them through whether a refinance would make sense.

lee lee

Everybody has a different set of circumstances. There are many different factors that impact interest rates and mortgages which is why [consumers] need to sit down with someone who offers different products for their needs or tailors the financing to them directly.

How Hard Is it to Refinance a Mortgage These Days?

mari MARI

It depends. You can have an experience where there is zero aggravation and delays to total annoyance. I just did my own refinance, and I had no problems. But I have good credit, a good loan-to-value ratio and I had all the data they wanted. They asked for tax returns and all kinds of other information, and I had it all at my fingertips. A lot of it comes down to how organized you are and how quickly you can put your hands on the documents they want. But even if you run into snags, just take everything with a grain of salt and laugh — there may be some funny moments when they ask you for totally inane documents — but if you have a sense of humor, you’ll get through it.

bill Bill

I don’t think it’s difficult at all. What I do think has changed is the checklist of documentation required to start the process. There’s a little bit more paperwork, but it’s stuff that everybody has.

lee lee

It really is no harder than for someone buying a house. The only difference is that with refinancing, we’re looking for equity in the property in order to support the refinance.

What Documents Do I Need to Refinance?

mari MARI

They are always going to ask you for personal tax returns and, if you run a business like I do, they will probably ask you for the business tax returns too. They will ask for paystubs, your current mortgage documents, a survey and asset statements. If you have some time to prepare, start getting your business or financial life in order because they will ask for those documents.

bill Bill

You need a pay stub and two months’ worth of bank statements. If you happen to have passive income or are self-employed, you need two years’ tax returns. We need to verify income and assets and then, depending on the type of income, such as Social Security or alimony, it might be a bit more nuanced.

lee lee

Tax returns for the past two years — all the pages and all the attachments, W-2s, 1099s, 30 days’ worth of paystubs. I usually ask the borrower to bring recent mortgage statements so we can see if there is any possibility of an escrow shortage; as well as a copy of their insurance declaration page so we can see when the insurance renews and how much it is; and a copy of the owner’s title insurance policy. That’s important because they’ll get a discount on the title insurance for the new mortgage. Also have a copy of the survey.

What Credit Score Do I Need to Refinance?

mari MARI

Your credit score will affect the rate you pay. Currently, to get the best rates you have to be at a 740. You can refinance if you’re lower than that, but it will cost you more. As a footnote, everyone now in the U.S. should be aware that your credit score is used to determine how much you pay on everything from car loans to refinances to whether you get a job and how much you pay for homeowners insurance. So it’s worth everyone’s time to clean up his or her credit score and improve it as much as possible.

bill Bill

Fannie Mae and Freddie Mac, which buy the vast majority of loans, require a minimum credit score of 620. If you’re eligible for a HARP refinance, that doesn’t apply.

lee lee

The main reason people refinance is to reduce their monthly payment and take advantage of lower interest rates. What people should also look at is their monthly payment. If they’re comfortable with that payment, then maybe they should look for a shorter term with the same payment so they can continue paying what they have been comfortable paying but also pay off the mortgage in a much faster timetable.

Can I Still Refinance if I Am Self-Employed?

mari MARI

Yes, but people who don’t have a traditional salary may find it more challenging. First, they should take a salary because it helps them budget. A lender will ask you for your business tax returns. I would say that if you’re contemplating a refinance in the future and you are self-employed, try to take a regular salary and substantiate good records because you will need to show [your lender] to do a refinance.

bill Bill

There’s no problem at all refinancing when you’re self-employed. But someone who is self-employed needs to be careful because if they have a lot of write-offs, the amount of their income used for qualification can be lower than what they thought.

lee lee

We’ll just ask them to bring tax returns for the business for the past two years in addition to the other documentation, and, depending on where we are in the calendar year, we ask them to prepare a profit and loss statement.

Can I Still Refinance if I Have a Few Late Payments on My Credit History?

mari MARI

You might pay a higher rate. The best advice is before you apply for a refinance, check your credit report and clean up anything you can in advance.

bill Bill

You have to pay your bills on time, but current guidelines do allow some flexibility.

lee lee

Sure.

Should I Wait for Lower Rates Before I Refinance?

mari MARI

Based on the last couple of years, you never know. No one would have ever thought that interest rates would get as low as they have, so it’s always possible they will go lower. In my opinion, though, you are looking at incredibly great rates now. Many of us took out our first mortgages when rates were in the teens, and the fact that someone will lend you money for 30 years in the 3 percent range is the bargain of the century. The likelihood is that rates will probably be higher. If you can lock in now for a long period of time, you are going to save thousands of dollars on your house.

bill Bill

Most clients today are looking for a no- or low-cost refinance, and if you get one, you can always refinance again. Talk to somebody who can assess your situation and put you into a terrific new loan program and, if rates drop further, you can take advantage again.

lee lee

I have been in this business 35 years and this is the longest [rates have] been this low. I would be very surprised to see rates go much lower.

How Much Equity Do I Need to Refinance?

mari MARI

It depends on the type of mortgage. You will get the best deal if you have 20 percent equity in your home. You can do a refinance if you have less, but to avoid paying private mortgage insurance and to sail through the refinancing process, it will be better if you have 20 percent equity.

bill Bill

You’ve got conventional refinances that go up to a 97 percent loan-to-value ratio. You’ve got FHA programs that go up to 97.75 percent. VA goes to 100 percent. So anybody who might be concerned about the old mortgage myth of needing 20 percent equity really needs to talk to a mortgage banker and find out what options are out there.

lee lee

[You need] 10 to 15 percent [equity] unless you qualify under the Fannie Mae or Freddie Mac refinance program.

What if I’m Underwater on My Current Loan?

mari MARI

There are special mortgage programs you can [participate in] if you’re underwater. One option is to pay down your mortgage.

bill Bill

It’s going to depend on the type of loan. HARP is a program for Fannie Mae and Freddie Mac loans taken out prior to June 2009. For those, there is no equity requirement. If you’ve shown a good pattern of paying and you’re current on your mortgage, you’re eligible to refinance. There are also FHA and VA options that let you refinance without an appraisal if you’ve been paying as agreed and have a good credit history.

lee lee

Fannie Mae and Freddie Mac have programs for refinancing regardless of the loan-to-value ratio. If [the mortgage] is not serviced by Fannie Mae or Freddie Mac, then a borrower really doesn’t have any options unless they pay down the current mortgage to increase their equity.

Do I Have to Pay Any Upfront Fees to Refinance?

mari MARI

On the [transactions] I’ve seen lately, all my clients have been asked to pay is the appraisal. I haven’t seen anyone being asked to pay any kinds of fees.

bill Bill

There are some costs such as the appraisal, title insurance and some closing fees. But there are no- and low-cost refinances where the lender will quote an eighth or a quarter of a point higher on the interest rate and pay those fees on the client’s behalf.

lee lee

When the borrower applies, there might be a fee for the credit report. Credit reports run from $15 to $20, depending on whether it’s individual or joint. The next thing the borrower will pay for is the appraisal, which runs from $395 to $475 depending on the financing. That would be all that they have to pay.

Comments have been edited for clarity.

9 Common Mistakes People Make When Refinancing—and How to Avoid Them

  • 1.
    Not Shopping Around

    If you fail to shop around and compare rates and terms, you could end up paying more than you should. Your refinance will probably be one of the biggest financial transactions of your life, so choosing the right mortgage and the right lender can save you thousands of dollars.

  • 2.
    Opening New Credit Cards

    If you are in the process of applying for a refinance, don’t obtain additional debt. In other words, don’t go out and buy, say, a car while a refinance application is pending. Taking on additional debt affects the ratios that lenders use to qualify you for the mortgage. Even if you fail to disclose the new debt, whether it be a credit card or a college loan, the lender will pick it up during the application process, and it will affect your ability to qualify. So once you start the refinance application process, don’t apply for any new debt until after you close on the loan.

  • 3.
    Not Gathering Required Documents Ahead of Time

    Your lender will ask for a lot of documentation, including pay stubs, tax returns, the title insurance policy and more. Start gathering these documents before you apply for a refinance. The quicker you can provide all the necessary documents, the faster and easier your application process will be.

  • 4.
    Failing to Get Accurate Quotes on Fees in Advance

    Many times the quotes you get on the phone for closing costs are actually estimates because the lender may not be familiar with the particulars of your local area. It’s not unusual for closing costs, title insurance premiums and even escrow amounts to be underestimated by lenders.

  • 5.
    Choosing the Wrong Term

    If you’ve already been in your home for five or six years, don’t extend your term by refinancing into a new 30-year loan. Instead, refinance into a 25- or 20-year loan. Since interest rates have probably come down significantly since you took out the original mortgage, you may be able to keep your payment the same but shorten the term of the mortgage. Refinancing into a new 30-year loan when you have already paid down your mortgage for a number of years will cost you a substantial amount of interest over that term.

  • 6.
    Not Paying Attention to the Appraisal Process

    In most cases, an appraisal will be required when you refinance your mortgage. Obviously, you want your house to appraise for the highest price possible. That’s why it’s important to be present when the appraisal takes place and to cooperate and provide information to the bank’s appraiser. Appraisers need to know about major upgrades to systems, renovations and additions. The more information you can provide your appraiser that helps him or her value the home as highly as possible, the better.

  • 7.
    Failing To Check and Repair Your Credit Prior to
    Applying for a Mortgage Refinance

    The interest rate on your new mortgage will be determined in part by your credit score. To expedite approval of your refinance, review your credit report and clean up any problems you discover.

  • 8.
    Misrepresenting Facts on Your Refinance Application

    It might be tempting to overstate your income, stretch out how long you’ve been working for an employer or say that you personally occupy your home when in fact you rent it out. Don’t. Misrepresentation on a mortgage application is a violation of federal law and comes with hefty penalties. You’ll be found out anyway because the lender will verify all information on the application.

  • 9.
    Forgetting That Your Lender is Not Your Servicer

    It’s common for loans to be sold on the secondary market, to Fannie Mae, Freddie Mac or to a large bank. The lender that takes your application and manages the loan closing may not be the company you deal with over the life of your loan. When your loan is sold, you start a new relationship with the loan servicing company.

Updated: July 27, 2017