How to refinance your mortgage: A step-by-step guide

You made it through the hardest part: buying a home. Now, perhaps just a few years later, you’re ready to refinance your mortgage. How hard can it be? You may be surprised to find that it’s not a couple-of-emails and a-phone-call-or-two process. In fact, there may be more paperwork involved this time around than when you first bought, especially if you went through the mortgage process in the “low-doc” days.

Let’s consider some important initial steps of a mortgage refinance — and then run through the process step by step.

The first step: Your mortgage refinance strategy

Before you begin, it’s important to consider why you want to refinance your home loan in the first place. That guides the process from the very beginning.

[Read also: Should I Refinance My Mortgage?]

Lowering your payment is usually the goal. And it’s tempting to refinance with another full 30-year term to really knock down that monthly payment. But that means you’ll end up taking even longer to pay off your house and paying more interest. You’ll want to take into account  how much interest you’ve already paid on your old loan and how much you’ll pay with the refinance.

Loans are front-loaded with interest, so the longer you’ve been paying, the more each payment is going toward paying off the principal balance. By resisting the urge to extend your loan term (or, better yet, reducing it) and getting a lower interest rate, you can significantly reduce the amount of interest you pay over the life of the loan.

Choosing a suitable loan term for your mortgage refinance is a balancing act between an affordable monthly payment and reducing your borrowing costs.

Use a mortgage refinance calculator

Once you know you have a good reason and you’ve determined it’s the right time to refinance, it’s time to work the numbers. Using a refinance calculator, like the one found on Zillow, can help you shop for the best mortgage.

You’ll need to know (or make some educated guesses about) the fees you’ll pay, your new interest rate and your new loan amount. There is even an option to roll the fees into the new loan under the “advanced” options of the tool.

Once you input the data, the tool will calculate your monthly savings, new payment, lifetime savings and the number of months until you break even, considering the costs of your refinance.

Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can use the calculator to help determine who offers the best deal.

It’s also key to shop the best refinance rates

Now it’s time for a little legwork — or more likely Web work and phone calls. You want to shop for your best mortgage refinance rate and get a loan estimate from each lender. Each potential lender is required to issue the estimate within three days of receiving your basic information.

The estimate is a pretty simple three-page document that details the loan terms, projected payments, estimated closing costs and other fees.

Compare the loan details from each lender and decide which one is best for you. This is a good time to really work that mortgage refinance calculator we just talked about.

President Obama’s refinance program

And while you’re shopping lenders, you may want to consider whether a government-sponsored mortgage program can be a part of your refinance solution. President Obama and Congress established the federal Home Affordable Refinance Program in 2009 to help revitalize a housing industry crushed by the financial crisis.

HARP — originally called the Making Home Affordable program — allows homeowners to refinance their mortgage no matter how little equity they have in their home. There are some restrictions: Homeowners must have conventional mortgages (loans owned by Fannie Mae or Freddie Mac) and they need to be current on their payments.

You can determine if your mortgage is held by Fannie Mae or Freddie Mac by checking here and here.

The Federal Housing Finance Agency estimates more than 429,000 borrowers nationwide remain eligible for a HARP refinance. More than 3.3 million borrowers have already refinanced their homes through the program, which has been extended several times but will expire on Dec. 31, 2016.

Refinancing your home loan, step by step

Ready to tackle the whole refinance process? Go!

• Determine your goal. We’ve covered this: Refinance for the right reason. Aim to shorten — or at least maintain — your current loan term while lowering your interest rate.
• Learn your current credit score. Check your credit history and get your credit score. The better your score, the better the mortgage refinance interest rates you’ll be offered.
• Research your home’s current value. Check your neighborhood for sales of recent homes like yours. Look up your home’s Zestimate on Zillow and other online home value sources.
• Shop for your best mortgage rate. But do all searching within atwo-week period so you don’t cause your credit score to dip a bit.
• Know your all-in costs. A home loan refinance can trigger a bunch of fees: application fees, the cost of an appraisal, origination fees, a document processing fee, an underwriting fee, a credit report charge, title research and insurance, recording fees, tax transfer fees and points, to name several. But remember, you’ll get a clear estimate of mortgage loan fees from each lender you consider. And don’t jump blindly for a “no-cost refinance” pitch. That means the lender is moving the upfront fees to your ongoing costs for the loan, in the form of a higher interest rate.
• Gather paperwork. This can be a bit harder these days because so many of us do our financial business online. But you’ll have to gather, print or download statements, pay stubs, and whatever else the lender will need during the loan process.
• Lock your rate. You’ll have to decide whether or not, and when, to lock your mortgage refinance rate. For the logically minded, it’s a hand-wringer — more art than science.
• Have cash on hand. There are likely to be property taxes and insurance, closing costs and other expenses to pay at closing, so be sure to set aside enough to cover them. Again, it’s listed in your loan estimate, so there should be no surprises.

A final tip

Remember to consider how long it will take for you to recoup the fees and expenses of a refinance. That was one of the outputs from the mortgage calculator we mentioned (the “break even” estimate).

But refinancing — for the right reason, with a good rate and a suitable term — can enhance your financial position.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick

This article first appeared in NerdWallet.