How to refinance your mortgage in 5 easy steps

Do you think it's time to refinance your mortgage? You’re in good company.

Refinance applications in the U.S. ticked up 6.8% the week ending August 7, nearly double the volume from a year ago, according to the Mortgage Bankers Association (MBA)’s Weekly Mortgage Applications Survey. Chalk up the refi spur to record-low mortgage rates: the average rate of a 30-year fixed mortgage has been hovering below 3 percent in recent weeks, mortgage giant Freddie Mac reports.

You can explore your mortgage refinance options by visiting Credible.

If you’ve never refinanced a mortgage before, don’t stress — refinancing your home is actually pretty simple and can lower your monthly payments. Here are the five steps you’ll take.

Step 1: Determine your financial goal

Step 2: Check your credit score and credit reports

Step 3: Assemble your refinance application documents

Step 4: Shop around

Step 5: Sail through settlement

Read on to learn more about how these moves can help ensure you're ready to refinance.

Step 1: Determine your financial goals

It’s important to determine what your motive is and whether the cost of refinancing is worth the payoff long term. You’ll probably refinance for one of these four reasons:

To cut your mortgage payments. You may want to refinance in order to nab a lower mortgage rate. In fact, about 15.6 million homeowners — or 30% of those with a mortgage — could lower their monthly payment by $289 if they refinance at today’s rates, according to data provided to Yahoo Money by Black Knight, a loan research and analytics firm. You can use an online mortgage refinance calculator to determine what your new monthly mortgage costs would be.

To pay off your home faster. Refinancing can enable you to reduce your loan term — say, by switching from a 30-year mortgage to a 15-year mortgage — and pay off your home loan in less time. The caveat: paying off your loan quicker usually means your mortgage payments will increase.

To stop paying private mortgage insurance. If you obtained a Federal Housing Administration (FHA) loan when you purchased your home, you’re paying mortgage insurance (PMI) — a premium that typically costs 0.55% to 2.25% of your original loan amount per year. Refinancing out of an FHA loan is the only way for you to stop paying PMI.

To tap into your home equity. You can also refinance to take cash out of your home in the form of a home equity loan (HEL) or a home equity line of credit (HELOC). This is usually done to make home improvements, pay for college, consolidate debt, or make a down payment on a second home.

You can visit Credible to get prequalified mortgage refi rates in minutes without impacting your credit score.

HOW TO GET THE BEST MORTGAGE REFINANCE RATES

Step 2: Check your credit score and credit reports

The average FICO score in the U.S. hit a record high of 703 in 2019, according to data from credit reporting bureau Experian. But, only borrowers with excellent credit scores — read: credit scores of 740 or higher — qualify for the best mortgage rates.

See if you qualify for lower rates with your current credit score — just insert your information into Credible's free online tools to see loan options and quotes within minutes without hurting your score.

You can get a free estimate of your credit score by visiting myFICO.com. In addition, you’re entitled to an annual free credit report from each of the three major U.S. credit reporting agencies — Experian, Equifax, and TransUnion — at AnnualCreditReport.com. Check your credit reports for errors that may be dragging down your score — one in four Americans in a Federal Trade Commission survey said they spotted mistakes on their reports.

5 FACTORS THAT AFFECT YOUR CREDIT SCORE

Step 3: Assemble your refinance application documents

By refinancing, you’re essentially applying for a new loan, which means you’ll be required to provide documentation to verify your income, assets, debts, and job history.

Here is a list of the most common documents you’ll need to complete a refinance application:

Two years of W-2s

Two years of tax returns

Two months of bank statements for any savings accounts and asset statements

A list of your current liabilities

A copy of your homeowner’s insurance policy

To streamline the application process, visit an online marketplace like Credible, where the document upload process is automated and there are fewer forms to fill out to view multiple lenders.

WHEN SHOULD YOU REFINANCE YOUR MORTGAGE?

Step 4: Shop around

To make sure you get the lowest mortgage rate that you qualify for, it’s crucial that you take time to shop around and compare rates from multiple lenders. After all, rates can vary significantly from lender to lender.

You can compare lenders and refinance rates by visiting Credible.

EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE

Step 5. Sail through settlement

Settlement, or “closing,” is the last step of the mortgage refinance process. This is where you’ll sign the final paperwork to obtain your new loan.

You'll need to bring a few things to closing:

A government-issued photo ID, such as your passport or driver's license.

Proof of homeowner’s insurance.

A cashier's check from your bank or a receipt from a wire transfer for any outstanding closing costs. Generally, closing costs on a refinance will range from 2 to 6% of your new loan amount.