How to Refinance

The Refinancing Process

Couple signing contract
••• Rob Daly / Getty Images

Refinancing is the process of getting a new loan to pay off existing debts, and it can sometimes result in huge savings. Ideally, when you refinance, you end up with a better loan, which usually means a lower interest rate—but there are other factors to consider, as well.

If you’re thinking of switching to a better loan, see how to refinance, including the necessary steps and critical factors to pay attention to throughout the process:

  1. Make Sure It Makes Sense
  2. Check Your Credit
  3. Get Quotes From Three (or More) Lenders
  4. Apply for Loans
  5. Make Your Decision

Make Sure It Makes Sense

Before you begin the refinancing process, figure out whether or not it makes sense to refinance. Doing so typically costs money (even if you don’t write a check for anything) and it takes a lot of time. When the benefits of refinancing are minimal, it may be the wrong choice. Determine exactly how much money you’ll save and how you’ll improve your situation.

Here are two ways to evaluate refinancing:

  1. Calculate the numbers on your existing loan and a new loan.
  2. Complete a breakeven analysis to understand how fees affect the outcome.

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

Check Your Credit

Your credit is important any time you apply for a loan—especially a significant loan like a mortgage. Since you know you’ll be applying, it’s wise to review your credit as soon as possible.

Find and fix errors: Verify 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 several weeks or more, so you need to get the ball rolling as soon as possible.

View your free credit reports: Federal law grants you one free copy of your credit report per year from each credit bureau, and those reports should contain almost everything you need to know. Read through, make sure you recognize all of the accounts that appear, and keep an eye out for any accounts that show late payments.

Limit new borrowing: Beware of hurting your credit before you refinance. If you apply for a loan shortly before you refinance (to buy a new car, for example), lenders will see that you’ve recently taken on more debt. That suddenly makes you a more risky borrower because you owe more to other lenders. You need to decide what is most important—the ability to refinance on the best terms or the ability to take on other loans. You may have to live without one or the other (temporarily, at least) if your credit and income can’t support both.

Get Quotes From Three (or More) Lenders

Once you have your credit in the best shape possible, it’s time to start checking with lenders. 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, including interest rates, loan features, and any fees. You might even 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 all of the options available. Doing so gives you choices beyond what they think you want.

Gather quotes from at least three different lenders. Next, 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. Inform lenders that you’d like to apply (or click an online button to get started), and they’ll provide instructions. You may have to fill out online forms, or you may receive 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. If you don’t, the deal may fall through or take longer.

Easy application process? It may be tempting to work with lenders that don’t dig into your finances. However, you might not get the best deal if you take that route. Yes, it’s easier to get through the process (and qualify for a loan) when the paperwork is minimal. But that suggests that your lender does not evaluate loan applicants carefully, so they don’t have a clear idea whether or not you’ll repay your loan. In many cases, the result is that they charge higher rates to compensate for that risk. An exception to that rule might be lenders who successfully use technology to predict your behavior.

Multiple applications and your credit: It’s understandable to worry that applying for loans with multiple lenders will hurt credit scores. After all, inquiries affect your credit slightly, 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 (typically between a few weeks and 45 days) without any penalty, so be sure to concentrate all of your shopping in a short amount of time.

Make Your Decision

Lenders will respond to your application—sometimes almost instantly—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, move forward with your chosen lender.

Verify that the transaction takes place by communicating with both the old lender and the new one. Don’t stop paying on your current loan until you’re certain that the loan has been paid off and you can safely stop paying.