How home refinancing works

The home refinancing process

The refinancing process usually involves:

• Find a lender: You can refinance your home with your existing mortgage provider or choose another lender that offers better loan terms. Compare different lenders to see what refinancing options are available. 
• Apply: Once you've chosen a lender, fill out your application and provide information about your income, debts, and assets. You’ll most likely need to submit documents such as pay stubs, tax returns, and bank statements as part of the review. 
• Wait for an appraisal: Your lender might require an appraisal to assess your home's market value and ensure it matches or exceeds the loan amount you're applying for. With a cash out refinance, an appraisal reveals how much equity you have to borrow against. Whatever type of loan you choose, prepare for an independent appraiser to visit your property, inspect its condition, and compare it to other homes in your neighborhood. 
• Close the loan: Your lender will review your financial information and the outcome of your appraisal before deciding whether to close on your loan. If successful, you'll sign your new mortgage documents and pay closing costs (unless you roll them into your new loan). By law, you have up to three days after closing (excluding Sundays and public holidays) to cancel your new loan without a penalty. 
• Receive funds: You'll normally receive funds from a cash out refinance a few days after the three-day grace period. Your lender might deposit your money directly into your bank account or issue you a check.

Do you lose equity when you refinance?

A straight refinance won't lower your home's equity unless you roll closing costs into your new loan. Adding these expenses to your mortgage balance decreases the paid-off portion of your home.

With a cash out refinance, you tap into your equity to receive a lump sum payment, which can also reduce how much of your property you own. Here's an example of what happens with a cash out refinance:

Your house is worth $500,000, and you have $200,00 left on your mortgage, so your available equity is $300,000. After getting a cash out refinance with a loan amount of $250,000, you pay off your mortgage and receive the remaining $50,000 in cash. Because you now owe $250,000, you have less equity than before. 

That said, a cash out refinance might provide benefits that outweigh the loss of home equity, such as access to a large sum of money for paying off large bills, consolidating debt, or taking care of other financial needs. 

FAQs about what happens when you refinance your home

What happens when you refinance a home loan? 

Refinancing involves replacing your existing mortgage with a new mortgage with better terms or exchanging home equity for cash. Like applying for a traditional mortgage, the process involves looking for the right lender, gathering financial documents, getting an appraisal, and closing your loan.

How long does refinancing take?

You could refinance your home loan in 5-7 weeks. To speed up your application, have your paperwork ready and respond quickly to your lender's requests for information.

How much does it cost to refinance?

Refinancing closing costs can be 2% to 5% of your new loan amount. Some lenders let you roll these costs into your new loan.

What credit score do I need for a refinance?

It depends on the lender and the type of refinance you're applying for. However, the higher your score, the more likely you are to qualify for the best refinancing terms and interest rates.