Mortgage Basics

7 Steps to Refinancing Your Home Mortgage

Mortgage rates remain historically low.

In fact, rates are so low that a mortgage consumer with decent credit can land a 30-year-fixed mortgage with a rate of 4.0%, or even lower for consumers with excellent credit. Consequently, it's a good time for a homeowner to "reset" their mortgage, and refinance into a loan with lower monthly payments and a lower interest rate.

That's especially the case given the potential for higher mortgage rates if the Federal Reserve hikes rates later this year. The best way to refinance successfully is to be prepared, know how to navigate the mortgage process, and avoid key "red flags" like high fees and credit approval issues.

"There's potential to save a ton of cash in a mortgage refinancing, but I would caution borrowers to look long and hard at the numbers," says Aaron Norris, vice president of The Norris Group, a real estate lender in Riverside, CA.

"The interest rate is only one piece of the equation. Banks may even be offering you a no-fee loan refinance, but borrowers should know very little in life is free."

The good news? A newly refinanced mortgage can provide a good cushion for a household budget.

Consider a 30-year-fixed-rate mortgage that originated in 2010, with an original loan amount of $250,000, at an interest rate of 5.0%.

By refinancing into a new home loan valued at $2,000,000, a homeowner refinancing into a new loan with a rate of 4.0% could save $387 per month, and provide a lifetime savings of $16,641—even with $6,000 in refinancing fees.

A Winning Approach to Mortgage Refinancing

How do you best manage successful mortgage refinancing campaign? Make these key steps the cornerstones of your refinancing plan:

1. Determine Your Target Rate

First, know the interest rate level where it makes sense to refinance, so you don't miss any great refinancing opportunities. "An interest rate any lower than what you need to come out ahead financially is icing on the cake," says Todd Huettner, president of Huettner Capital, a residential real estate mortgage lender located in Denver, CO.

To land at the best number, estimate the number of years you plan to be in your home or have the loan, Huettner advises. Then divide the closing costs by the annual savings to calculate the break even in years for a given rate.

"You should refinance if you are likely to be in the home beyond the break-even date," he notes. Zillow offers a handy mortgage refinancing calculator that can help you establish your ideal lending rate. Find it here.

2. Choose a qualified lender

The best refinancing interest rate means nothing if you can't close the loan, Huettner says.

"Many loan officers are simply sales people without the specific underwriting experience or knowledge required to close your loan," he explains."Before you waste time and money as rates go higher, make sure your lender is qualified."

Consumer Affairs provides a database of qualified U.S. mortgage lenders.

3. Shop around

Some people make the mistake of refinancing with their current lender, or the first one they speak to without shopping around, notes Randall Yates, founder and CEO of The Lender's Network.

"It's important to shop multiple lenders when refinancing your mortgage," Yates says. "Interest rates, closing costs, and other fees will vary lender to lender. You should get three-to-four loan quotes so you'll be able to ensure you're receiving a competitive rate. Fees and rates also can be negotiated and using loan quotes from other lenders helps your negotiating power."

4. Watch out for high lending fees

No doubt, mortgage lenders will try to add fees and costs that will be refinanced into your new refinance loan. "If there are myriad closing fees and points as part of your loan, calculate what you're saving monthly and see if it's really worth the trouble," says Norris.

For example, if you're closing costs end up being $3,000 and you're only saving $100 per month, you'd need to stay in the loan 30 months before ever seeing any kind of savings. "If you're in the home long-term, it could be perfect for you," he adds. "If not, you could always throw a little extra cash at your principal balance and save money by paying off your loan early."

While the total cost of any refinanced mortgage varies based on credit score, loan amount, lender, and interest rate, borrowers can count on paying the following closing costs: escrow and title fee, lending fees, points (including discount fees and origination fees), appraisal fees, credit fees, insurance fees, and relevant property taxes.

5. Be patient about signing a mortgage

One big mistake lending industry professionals often see when people refinance is the borrower signing off on the deal too quickly.

"People don't look over the costs, fees, and contract clauses—they just sign away, assuming they are getting a better rate, and only looking at that lower monthly payment," notes Denise Supplee, a professional realtor with Long & Foster in Philadelphia, Pa., who has refinanced her own home. "Later on, the borrower is astonished there were exorbitant fees or pre-payment penalties attached to the loan.

The moral of the story? Read the fine print first, before you sign."

6. Take advantage of good credit

One of the most common reasons to refinance is to decrease the monthly payments by lowering the interest rate.

"The majority of the time, this decision is made by individuals who have acquired a reasonable amount of home equity," says Rhett M. Struve, owner of, a real estate services firm in Minneapolis-St. Paul, Minn. "Although a large amount of equity is not a requirement, it's commonplace because credit scores begin to increase as monthly mortgage payments are made." Struve notes the basis of any refinancing and credit score relationship is similar to the initial mortgage acquisition.

The higher the credit score, the lower the interest rates will be, and vice versa, he explains. "Just because interest rates may be low, does not imply that everyone can feasibly obtain these rates," Struve says. "But if a homeowner diligently made payments in a punctual manner on all of their life expenses, their credit score would simultaneously increase, and the refinancing loan terms should be more favorable."

7. Don't open any credit during the refinancing process

As with buying a house,applying for a new credit card or car loan while you're in the hunt for a new home refinancing loan can lead to problems.

"The last time I was trying to accomplish a mortgage refinancing loan I made the huge mistake of opening a $500 credit line at Macy's," says Norris. "It completely blew up the transaction. I paid it off in full within a week but underwriters could not see past the new line, even with proof it had been paid off."

Hit the Reset Button

If you're looking to either increase the value of your home investment, or are just looking to knock off a few bucks off of your monthly mortgage payment, a home refinancing loan can, indeed, be a good "reset button" option for you.

If you do your research, shop for a good deal, watch your credit, and take your time, a mortgage refinance loan is within your grasp, and could make the personal financial side of your life much more manageable.