Refinancing your home mortgage may seem overwhelming at first, but, by reviewing your finances and gathering the correct documentation, a mortgage refinance can save you money in the long run.

The words “ refinancing mortgage” can be enough to give anyone a headache. Especially when considering that monthly mortgage payments might leave your wallet emptier than you’d like.

But taking another look at the requirements to refinance a mortgage can be an important step in saving money in the long run. Maybe you’re looking for a lower mortgage rate and monthly payments. Or perhaps you want a shortened loan term. Refinancing can even get some extra cash in your pocket to fund that dream home improvement project or your kid’s college tuition.

No matter the reason, revisiting your loans is a valuable step in cutting costs. Here at

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, we created this guide to walk you through the ins and outs of what is required to refinance a mortgage.

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Why refinance a mortgage?

Refinancing your mortgage can save you money long-term, if not immediately, but how you get the savings is not a one-size-fits-all equation. Refinancing can help you to pocket some extra cash by reducing your interest rate or monthly payment, switching to an adjustable-rate mortgage, or getting to cash out some of the money that has gone to your mortgage.

Lower your interest rate

Things change with time and, in keeping with this old saying, the interest rate on that mortgage you took out years ago may no longer fit where you are now.

Maybe your credit score has improved since you applied for your mortgage, and you will qualify for a lower interest rate. Or, perhaps mortgage rates were higher than they are now so you’re interest rate will be based on a smaller base fee.

No matter the reason, refinancing your loan in order to get a lower interest rate can help you save money in the long run.

Reduce your monthly payment

Need we say more? Smaller monthly payments mean more cash in your wallet. You’ll have to take out a new loan with a new term when refinancing a mortgage. This gives you the opportunity to opt for a longer repayment period (i.e. the time it will take you to pay off the loan), which results in smaller monthly payments. Or, if you are able to get a lower interest rate, each month will have smaller payments.

Keep in mind, however, that a longer repayment period may mean that you pay more interest in the long run.

Help you pay off your home early

Interest fees can add up fast. Some people opt for shorter loan terms to pay off their loan faster—and the sooner you stop making monthly interest payments, the more money you get to save.

If you’re hoping to pay off your loan sooner than later, then it’s likely time to refinance your mortgage to get a shorter loan term. Yes, you may pay more right now, but it will be worth it over time.

Switch from an adjustable-rate to a fixed-rate mortgage

With an adjustable-rate mortgage (ARM), you run the risk of your loan’s interest rate fluctuating over time because the interest rate follows the current market. Maybe an ARM was a good choice back when you took out the loan, but these needs, too, can change with time.

By contrast, a fixed-rate mortgage has the same interest rate over the course of the loan’s life. If you’re looking for a steady loan, it might be time to switch from an ARM to a fixed-rate mortgage—refinancing is an important first step in securing a consistent loan rate.

Do a cash-out refinance

Yes, you read that right! A cash-out refinance replaces your current mortgage with a loan that is more than you owe on your home. Then, you will be reimbursed with the difference between the new loan and your existing mortgage in cash.

This is often a good option if you’re needing money to finance a big home improvement project or renovation, cover your child’s college tuition fees, or consolidate your debt, among other expenses.

Key Takeaway: Refinancing your mortgage can help save you money in the long run, especially if your financial needs have changed since you first took out the loan.

What is required to refinance a mortgage?

So, now that you know why you should refinance your loan, how do you go about applying for a refinance? There is some important documentation to have in order when you’re looking to refinance.

Good standing on your current mortgage

Before applying to refinance your mortgage, it is important to make sure all payments have been made on your current mortgage. If you have any overdue payments, you’ll need to pay those before refinancing.

Credit score requirements

On average, the minimum credit score needed to refinance a mortgage is between 580 to 680. Some government programs are more lenient and accept credit scores as low as 500.

If you’re a U.S. veteran, you may be applicable for the Department of Veteran’s Affairs Interest Rate Reduction Refinance Loan, which has no credit score minimum.

Home equity

In the simplest of terms, home equity is the percentage of the home’s value that you own if you were to subtract your mortgage amount from the house’s total value.

When refinancing a mortgage, a general rule of thumb is that the value of the home you’re looking to refinance must be slightly higher than your mortgage balance. The higher your home equity rate, the more likely you will be approved for a new loan with a lower interest rate and monthly payments.

Debt-to-income ratio (DTI)

This ratio is expressed as a percentage and is equal to your minimum monthly debt (i.e. your car loans, student loans, credit card debt, home equity loans, and mortgages are common examples) divided by gross monthly income.

This ratio helps lenders determine whether you can pay your home loan. Lenders prefer a DTI of 43% or lower—the higher your DTI, the harder it is to qualify for a mortgage refinance

Closing costs

This is the cost needed to close, or payout, your preexisting loan, which must be done before applying for a new loan. Closing costs can include origination fees, appraisal fees, prepaid property taxes, title fees, credit check fees, and more.

To learn more about what closing costs you might have to pay, review your loan terms and contact your insurance company.

Key Takeaway: Requirements for refinancing your loan can vary by lender, but having these basics covered will make sure that you’re prepared for any loan or lending program.

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Home insurance terms you need to know

Documents needed to refinance a mortgage

Now comes the actual nuts-and-bolts application part of the process. You’ll need to get your paperwork in order before you begin the refinancing process.

Each application will be slightly different depending on your bank, but the same general documents are needed no matter your lender:

Mortgage account statements

Home equity lines of credit

Title

insurance

policy

Car

and student loans

W-2 forms

Tax returns

1099s

Proof of employment and/or income history

Paystubs dated from the past two to three months

Once you’ve gathered all of the required documentation, you’ll have all the needed pieces to apply for a mortgage refinance.

Homeowners insurance

Most mortgage refinance applications require homeowners insurance because it gives the lender peace of mind that the home is financially protected. Additionally, many lenders require home insurance before giving you a loan—if you don’t have insurance on your house, you likely pay higher interest rates.

This is also a good time to reevaluate your home insurance coverage—whether you’re unhappy with your insurance costs or need better coverage, the

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FAQs

What is required for refinancing?

You’ll need good standing on your current mortgage, good credit score, home equity, DTI ratio, cash to cover closing costs.

Can you get denied for refinancing?

The short answer is yes. But it depends on a combination of factors. If your credit score does not meet the minimum requirement, your DTI is over 43%, you have outstanding payments on your current mortgage, or your home insurance does not provide adequate coverage for your lender, odds are you will get denied for refinancing. Some lenders may have additional qualifications, so be sure to contact them for additional information.

How much do I have to earn to refinance my house?

There is no one-solution answer—the general rule of thumb is that you are eligible to refinance your house if your home equity value is at least three percent higher than the value of your mortgage.

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