How to Refinance Your Mortgage

Relief may be around the corner for the “buy now, refinance later” home buyers and generally, for all borrowers. The higher for longer rates are expected to end in 2024 with at least three rate cuts projected through the year.

Although the Fed does not set mortgage rates directly, as rates come down, mortgage rates should follow. Goldman Sachs Research expects the mortgage rate to go below 6.5% by end of 2024, and potentially hit 6% by 2025. Bear in mind, this could all change as there is uncertainty around how quickly the rates could come down.

Still, if you are looking into refinancing your mortgage, here’s how it would work and some tips to consider.

What is refinancing?

When we talk about refinancing to take advantage of lower rates, we’re referring to a rate and term refinancing, sometimes called a rate and term option or Rato mortgage. When you refinance, your lender pays off your old mortgage and replaces it with new terms. You will then make monthly payments to your new loan.

Here are three common refinancing options:

1. Lower interest rate

With rate cuts expected for 2024, lowering the interest rate can help you save over the course of your loan. You may qualify for a lower rate if you have a good credit score, or less debt now than when you originally got the mortgage.

2. Lengthen or shorten the loan term

Refinancing to a longer term could help reduce your monthly payment but it will increase your overall payment over time. If you choose to shorten your term, for instance, to 15 years from a 30-year mortgage, your monthly payment amount would increase but you pay less interest over time. You’ll also own your home sooner.

3. Change the type of loan

You may be able to refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage or refinance a Federal Housing Administration (FHA) loan to a conventional mortgage.

How to qualify for a refinance

Like your initial mortgage, you will need to meet minimum requirements for a lender to refinance your loan. Some typical information they look at include:

Credit score: Most lenders set their own minimum credit score but expect around 620 to qualify for a conventional loan. If you have a lower score, consider an FHA loan, which generally requires scores of 580. For even lower credit scores, you could qualify for an FHA Streamline Refinance with conditions. If you have a loan through Veteran Affairs, you could check if you qualify for a rate refinance.

Debt-to-income ratio: This ratio is calculated by dividing monthly minimum debt payments by your monthly earnings, before tax.

Closing costs: When calculating the total amount of your mortgage, consider the closing costs as well, which could range from 2% to 6% of the principal balance on your loan. There are also no-closing-cost refinance loans, but you’ll likely need more equity in the home to qualify.

What’s the application process?

Once you’ve determined what type of refinancing you need and the strength of your application, shop around! No one lender is the same, and some may offer better mortgage rates, or consider lower credit scores. Once you’ve found a lender who fits your needs, here are the typical next steps.

1. Submit application: State the terms you want to refinance and fill out an application. Most lenders would ask for at least two recent paystubs, bank statements, and W-2s. If you’re self-employed, be prepared to offer more documentation. Once you submitted your application and documents, the lender will undergo an underwriting process to check your income and information.

2. Loan estimate: Lenders will give you a loan estimate which includes costs and fees associated with the loan. You may also have an option to lock your interest rate for a short time. As interest rates fluctuate, locking in your rate can help secure that rate until you close on your loan.

3. Appraisal: Lenders then will schedule to have your home appraised – or valued – in which you could attend as well. Make sure your home is in the best condition when the appraiser arrives. (Certain types of loans such as the VA and FHA Streamline may not require this step.)

4. Closing disclosure: Once the lender has finished their review, they’ll send you a closing disclosure, where you’ll find information on your principal balance, interest rate and monthly payment.