What Is a Refinance?

A refinance is when a borrower takes out a new loan to pay off their existing one, often to take advantage of better terms. Refinancing is most commonly associated with mortgages, but it can also apply to auto loans, personal loans, and student loans.

When you refinance a mortgage, for example, you replace your current home loan with a new one—often at a lower interest rate or with different loan terms. Some borrowers use refinancing to shorten their loan term, while others refinance to tap into their home’s equity through a cash-out refinance.

Why Do People Refinance?

There are several reasons why homeowners and borrowers choose to refinance, including:

• Lowering interest rates: Securing a lower rate can reduce monthly payments and save money over time.
• Reducing loan terms: Switching from a 30-year mortgage to a 15-year mortgage helps pay off debt faster.
• Switching loan types: Some homeowners move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more stability.
• Accessing home equity: A cash-out refinance allows borrowers to use their home equity for renovations, debt consolidation, or other expenses.

Who Qualifies for a Refinance?

Not everyone is eligible for refinancing, as lenders evaluate several factors before approving a new loan. Here’s what you typically need to qualify:

1. Good Credit Score

Lenders prefer borrowers with a credit score of 620 or higher for conventional loans, but those with excellent credit (740+) qualify for the best interest rates. FHA and VA loans may allow lower credit scores.

2. Sufficient Home Equity

For mortgage refinancing, most lenders require at least 20% home equity to qualify for the best rates. A lower equity percentage may still be accepted, but it could result in higher interest rates or private mortgage insurance (PMI).

3. Stable Income and Employment

Lenders assess your income, employment history, and debt-to-income (DTI) ratio. Most prefer a DTI below 43%, though some programs allow higher ratios with compensating factors.

4. Loan-to-Value (LTV) Ratio

Your loan-to-value ratio (LTV) compares your loan balance to your home's value. A lower LTV ratio (under 80%) increases the likelihood of approval and better terms.



5. Recent Payment History

Lenders review your payment history on your existing loan. Late payments or delinquencies may impact eligibility.

How to Refinance a Loan

If you meet the qualifications, refinancing is a straightforward process. If you need additional help, it is beneficial to reach out to a mortgage loan officer as they are well educated in refinances and can guide you through each stage. Here’s a step-by-step guide to get you started:

Step 1: Determine Your Goal

Ask yourself why you want to refinance. Are you looking for lower monthly payments, a shorter loan term, or cashing out home equity? Defining your goal helps you choose the best refinancing option.

Step 2: Check Your Credit and Finances

Before applying, review your credit score and debt-to-income ratio. If necessary, improve your credit by paying down debts and making on-time payments.

Step 3: Shop Around for Lenders

Compare multiple lenders to find the best refinance rates and terms. Don't just go with your current lender—other banks, credit unions, or mortgage brokers may offer better deals.

Step 4: Apply for the Refinance Loan

Once you choose a lender, submit a refinance application. Be prepared to provide financial documents like:

• Recent pay stubs
• Tax returns
• Bank statements
• Current mortgage details

Step 5: Get an Appraisal and Underwriting Approval

Lenders typically require a home appraisal to determine its market value. Afterward, they’ll review your application and approve or deny the refinance.

Step 6: Close on the New Loan

If approved, you'll go through the closing process, sign new loan documents, and pay any closing costs. Once finalized, your old loan is paid off, and the new loan terms begin.

Types of Refinancing

There are several refinancing options depending on your financial goals.

1. Rate-and-Term Refinance

This is the most common type of refinancing, where borrowers replace their loan with one that has a lower interest rate or a different term (e.g., switching from a 30-year loan to a 15-year loan).

2. Cash-Out Refinance

A cash-out refinance allows homeowners to borrow against their home equity, replacing their mortgage with a larger loan and taking the difference as cash. This option is popular for home improvements, debt consolidation, or major expenses.

3. Cash-In Refinance

With a cash-in refinance, you pay a lump sum toward your loan principal during refinancing to lower your loan balance and potentially secure a better interest rate.

4. Streamline Refinance

Government-backed loans like FHA and VA loans offer streamline refinancing, which requires less paperwork and no appraisal for qualified borrowers looking to lower their interest rates.

5. No-Closing-Cost Refinance

In this option, borrowers avoid upfront closing costs by rolling them into the loan balance. While convenient, it can result in slightly higher monthly payments.

Is Refinancing Right for You?

Refinancing can be a smart financial move if you want to lower your monthly payments, pay off debt faster, or access home equity. However, it’s essential to consider closing costs, loan terms, and your long-term financial goals before making a decision.

If you’re unsure whether refinancing is right for you, working with an experienced mortgage loan originator can help. Sally Bernard, MLO, has helped countless homeowners secure better loan terms, reduce interest rates, and achieve their financial goals. Contact Sally today to explore your refinancing options and find the best loan for your needs!