Home Refinancing Steps - The 5 Steps to Success

What steps are involved in the refinancing process, and what should you know about each step? That’s what I’d like to talk about in today’s lesson.

Below, you’ll find an outline of the home refinancing steps most people go through. I used the word “most” because the refinance process varies between different lenders, and from one borrower to the next. But regardless of these differences, most homeowners will go through the steps presented below in some way.

Where These Refinancing Steps Came From

If you do an Internet search for the title of this lesson — home refinancing steps — you’ll find literally thousands of articles on the subject. You’ll also be amazed by how much they vary from one source to the next. That’s because some authors skip over certain steps in the refinancing process, or they combine some and separate others. In other words, every author has their own unique view of the process.

So here’s what I’ve done. I read through ten articles that covered this subject, on the websites of industry experts (LendingTree, Bankrate, etc.). Then I took the home refinancing steps that were common to all of those articles and put them into a “master list” of steps. I removed any redundancies that occurred. Lastly, I explained each step in my own words, and in the clearest manner possible. Below, you’ll find the result of these efforts — a comprehensive guide to the home refinancing success.

5 Steps to Refi Success

Without further introduction, let’s talk about the various steps involved in refinancing your home mortgage. I’ve put these items in the order that I feel makes the most sense. For example, if you go through step #2 and find out that your property values have tanked, the rest of the refinancing process may be a moot point. You’ll see what I mean.

Refinancing Step Step #1 — Identify your goals for the refinance.

Why do you want to refinance your home mortgage? Is it to secure a lower interest rate on the loan, and possibly lower your monthly payments as well? Do you want to shorten the term of “life” of the loan? Or perhaps you want to pull cash out of your equity to pay off other high-interest debts, such as credit cards. Under the right circumstances, a refi loan could accomplish more than one of these goals.

The important thing is that you understand why, exactly, you want to refinance your mortgage. This is an important step in the home refinancing process, because you can’t complete the other steps without knowing what your goals are.

Refinancing Step #2 — Find out what your home is currently worth.

This is another important step to do early on, because it may reveal some unpleasant surprises. If you’ve been watching the news lately, you’ll know that home values have dropped over the last few years (2007 - 2009), in most parts of the United States. In some places, such as California and Nevada, they dropped a lot.

What does this have to do with home refinancing, you ask? Well, if your property value has dropped beyond a certain point, it could wipe out whatever equity you’ve built up. And as you’ll see in home refinancing step #3 below, equity is one of the first things a lender will look at when considering you for a refi loan.

You can get a rough estimate of your home’s value by using one of the website’s listed in this article. For more accurate results, you should have a professional home appraiser come out for a visit. The lender will send their own appraiser out when you apply for the refinance loan, but some people choose to have their own appraisal done (before the lender does it).

Remember, home value is one of the items you need to calculate your equity. And you need a certain amount of equity to refinance the home — ideally 20% or more. So whether you get your own appraisal or wait for the lender to do it, it’s a necessary step in the refinancing process.

Refinancing Step #3 — Determine the amount of equity you have.

Equity is a fancy word for ownership. And within this context, it refers to the difference between your home’s current value and the outstanding balance of your mortgage loan. If your home is valued at $400,000 and your loan balance is $200,000, then you have 50% equity — or 200k worth of equity. To determine this, I simply subtracted the loan balance from the value of the home.

For a “regular” refinance loan, you’ll probably need 20% equity or more. If you qualify for refinancing under the Making Home Affordable program, you can probably get by with having less equity. In fact, some people have been able to refi with negative equity by using this program — in other words, they got approved even though they owed more on the mortgage than the home was worth. If you are seriously upside down in the mortgage, then you’re probably out of luck.

Now you can see why this is such an important step in the home refinancing process. Depending on the amount of equity you have in your house, you may or may not be able to refinance the loan.

Refinancing Step #4 — Review your credit reports and scores.

I had trouble deciding where to put this step in the grand scheme of things. It could just as easily be placed at the beginning of the list. The most important thing is that you check your credit before you start talking to mortgage lenders (step #5 below). You don’t ever want to sit across the table from a lender who knows more about your credit situation than you do. It takes away your leverage.

What credit score do you need for home refinancing purposes? This is a tough question to answer, because it will vary from one lender to the next. But if you want to get the best rates the lender has to offer, you’ll probably need a FICO score of 750 or above. That’s just an average, though, so don’t take it as gospel.

If you find out that your FICO score is too low, you should focus your effort on improving it. That’s why I’ve listed this refinancing step before #5 (talking to lenders). It doesn’t make much sense shopping around for rates if your credit score is in the “basement.” Fortunately, there is plenty you can do to improve your score, and this section of our website offers tips on getting started.

Refinancing Step #5 — Shop for refinancing rates and terms.

If you have followed the home refinance steps in order and have reached this point, then we can assume a few things. Let’s assume you have 20% equity or more, and a credit score above 750. In this scenario, you may be a good candidate for a refinance loan. The next step is to get offers from lenders. In this stage, you will learn two important pieces of information that are needed to complete the next step. You’ll find out (A) what interest rate the lender is willing to give you and (B) the approximate amount of closings costs on the loan.

Many people overthink this home refinancing step, when in fact it’s fairly straightforward. You simply visit a lender’s website and start the application process. You could also call your current lender on the phone to begin the process. Another easy way to get started is by using an online lender network (see the yellow box at the top of this page).

Eventually, the lender will request certain documents from you. This will probably include your w-2 tax statements for the last couple of years, proof of income, bank statements and more.

Refinancing Step #6 — Does it make sense to refinance?

Now let’s assume that you get a home refinancing offer from a mortgage lender. What are looking for? How do you know of it’s a good idea to proceed with the loan? For one thing, you need to determine the break-even point. This is the point where you save more money over the term of the new loan than you spend in closing costs. There’s an entire lesson on this site that covers this subject. See the links below:

• When should I refinance my home?
• Should I refinance now or wait until later?

So there you have them, the primary steps to refinance a mortgage. Remember, this process will vary slightly from one lender to the next, and from one homeowner to the next. But you can expect to encounter the home refinancing steps outlined above in some way, shape or form.

If you have additional questions about this topic, I recommend using the search tool at the top of this blog. If you would like to get move forward in the process and get quotes from lenders, there’s a link provided at the top of the blog as well. Good luck.