How to Refinance

What Steps are Needed to Refinance a Loan?

Refinancing is the process of swapping out loans, and it can sometimes result in huge savings. Ideally, you’ll refinance only when you can get a better loan -- usually that means a lower interest rate, but there are other factors to consider as well. If you don’t know how to refinance, you’re in the right place; we’ll discuss the steps involved and the things you should pay attention to.

Does Refinancing Make Sense?

Before you even get started on the refinancing process, figure out whether or not it makes sense to refinance.

The process costs money (even if you don’t write a check for anything) and it takes a lot of time. If the benefits of refinancing are minimal, it may be a bad choice. Determine exactly how much money you’ll save and how you’ll improve your situation.

Once you’re sure that refinancing is a wise choice, it’s time to move forward.

Watch Your Credit

Your credit is important any time you apply for a loan -- especially a large loan like a mortgage. Since you know you’ll be applying, it’s a good idea to review your credit as soon as possible. You’ll want to be sure that there are no errors or surprises in your credit reports that will derail the process. It’s best to find out about these things before you begin applying for loans; getting errors corrected can take a while, so you need to get to work on those as soon as possible.

You’re allowed to view your credit reports for free, and those reports have everything you need to know.

Just read through and make sure you recognize all of the accounts that appear, and keep an eye out for any accounts that show late payments. If you’re not sure how to get your credit reports, see this page.

Beware of fiddling with your credit before you refinance. If you apply for a loan just before you refinance (to buy a new car, for example), lenders will see that you’ve recently taken on more debt.
All of a sudden, you become a more risky borrower because you owe more to other lenders. You’ll have to decide what is most important -- the ability to refinance your loan or the ability to make a new purchase. You may have to live without one or the other if your credit and income is not strong enough to support both.

Contact Lenders

Once you know that your credit is in good shape, it’s time to start asking around. Contact several different types of lenders: credit unions, online lenders, large banks, and small banks. Ask your friends and family who they’ve borrowed from in the past and where they had good experiences.

Gather as much information as you can about each loan program, interest rates, and any fees. You might even want to get several offers from each lender. Some will try to tempt you with so-called no-closing-cost loans, which may be appealing today, but can end up costing a lot more over time. Ask about other options available.

Narrow the field down to two or three lenders, and start applying for loans.

Apply for Loans

The application process is simple, but time consuming. Ask your lenders how to apply, and they’ll provide instructions. You may have to fill out online forms, or you may get a stack of paper.

Expect to provide a lot of detail about yourself and your finances. You’ll need to dig up records that document your identity, your income, and your assets. Loan applications ask for specific information, and it’s best to answer as accurately as possible -- otherwise the deal may fall through.

It may be tempting to work with lenders that don’t ask many questions. However, you might not get the best deal if you take that route. Yes, it’s easier to get through the process (and it’s also easier to qualify for a loan) when the paperwork is minimal, but what does this tell you about your lender? It suggests that they do not look at loan applicants very closely, and they don’t have a very good idea whether or not you’ll repay your loan. In many (but not all) cases, this means that they also charge higher rates to compensate for that risk.

Readers often ask if applying for loans with multiple lenders will hurt credit scores. Any application will ding your credit a little bit, but lenders know that you may shop around (they even expect that from savvy consumers). For certain loan types, like mortgages and auto loans, you will not do any more damage by applying with several lenders. The credit scoring programs allow you to shop within a window of time (somewhere between a few weeks and 45 days) without any penalty, so just be sure to do all of your shopping in a short amount of time.

Make a Decision

Lenders will respond to your application -- sometimes very quickly -- with details about any loans available to you. Take some time to compare all of the offers, read the fine print, and run some numbers. Figure out exactly how each loan will work by modeling it with a loan calculator. Once you’ve determined which loan is best, it’s just a matter of a few signatures for the lender and you’re done.