How to Refinance Your Mortgage - NerdWallet (2024)

FAQs

How to refinance an existing mortgage? ›

Home equity requirements by loan type

Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent). This also helps you avoid private mortgage insurance payments on your new loan.

To refinance your mortgage, you'll need to meet your lender's refinancing requirements, which will likely include having enough equity in your home and having a debt-to-income ratio of 43% or lower. Kat Tretina is a freelance writer specializing in personal finance.

A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you'll likely need 20% equity in your home. This number is often the amount of equity you'll need if you want to do a cash-out refinance, too.

At the same time, refinancing can be a little complicated, especially if your credit score is less than ideal or you're not completely sure what to expect. When you refinance, it means you're essentially taking out a brand new loan on your property, often for the remainder that you owe (but not always).

Generally, you will need at least 20% equity in your home to qualify for a refinance. Having higher equity can give you access to more favorable interest rates and loan terms. However, there are loan programs available for borrowers with less equity.

Refinancing your mortgage does not have to negatively impact your home equity. Just the opposite, in fact: The goal of a refi generally is to get a new loan with lower interest rates, making repayments easier and allowing you to build equity faster.

Refinancing too often or leveraging too much home equity

Avoid making the mistake of refinancing excessively to land a low interest rate. The charges to refinance repeatedly could add up over time, negating the benefits. Be wary of also leveraging home equity too often.

Yes — like a first mortgage, you can refinance a home equity loan. This makes the most sense if you can get a better rate now than when you took out the loan. Refinancing can also be a good idea for borrowers who want to switch from an adjustable rate to a fixed rate or who want to tap more of their equity.

To qualify for a refinance, take a look at your debt-to-income ratio. The new monthly mortgage payment shouldn't be more than 30% of your monthly income. To refinance $200K over a 30-year fixed term, you'll need an income of approx. $5,200/month.

Do I need a down payment to refinance? ›

You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.

If you're looking for an opportunity to change your loan terms, lower your monthly mortgage payments or tap into your home equity, you might benefit from a mortgage refinance. But, like financing a new home purchase, one of the requirements for refinancing is that homeowners pay closing costs on the new loan.

Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.

For a simple rate-and-term refinance, you can refinance at any time if it's a conventional loan, after seven months if it's an FHA streamline refinance, after 210 days (or six payments, whichever is longer) if it's a VA loan or after 12 months if it's a USDA loan.

Can you refinance with the same lender? You can usually refinance with the same bank or lender that you originally got a loan through. But keep in mind, your mortgage lender is the institution that originated your loan, and that may be different from your current servicer.

In many cases, there's no waiting period to refinance. Your current lender might ask you to wait six months between loans, but you're free to simply refinance with a different lender instead. However, you must wait six months after your most recent closing (usually 180 days) to refinance if you're taking cash out.

Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.

In most cases, you may refinance a conventional loan as soon as you want. You might have to wait six months before you can refinance with the same lender.