Does refinancing your mortgage require a down payment?
Quick insights
- Refinancing a mortgage does not require a down payment, but closing costs are typically involved.
- To refinance, you generally need a credit score above a specific threshold, a certain loan-to-value (LTV) ratio and proof of income.
- Saving up for closing costs and improving your credit can help you secure better refinancing terms.
Refinancing a mortgage replaces your current loan with a new one. This isn’t the same as buying a house, when you put money down to lower the loan needed for the purchase. However, refinancing usually requires money upfront for closing costs, but they can also be rolled into the cost of the loan.
You might refinance a mortgage to lower your interest rate, monthly payments or both. Changing your loan term can also be beneficial, depending on your financial goals and circumstances. Let’s review refinancing in more detail.
What requirements should you meet to refinance a mortgage?
You generally need the following to refinance your mortgage loan:
- A minimum required credit score: Lenders might require a certain score to qualify for a refinance, such as a minimum of 620; minimum requirements can vary depending on the mortgage loan. Your score represents your borrowing activity, from payment history to total debt; higher scores can indicate responsible credit usage.
- Low loan-to-value (LTV) ratio: Your home’s current value minus the outstanding loan amount can be converted to a percentage. That’s your LTV ratio, and a certain percentage may be needed to refinance the mortgage.
- Good mortgage standing and current mortgage info: Lenders have different approval criteria for mortgage refinancing. However, positive payment history and being up to date on existing loan payments is often preferred. When refinancing with your current lender, some of the existing mortgage information, such as your loan details, is probably on file already.
- Proof of income: After refinancing, you still have a loan to pay. Proof of income, such as tax returns or pay stubs, can help assure lenders that you can afford the new monthly payments and repay the new loan.
- Closing costs: These fees can vary but are normally charged on purchases and refinances alike. This up-front money due when you close isn’t the same as a down payment, though. The down payment lowers your loan amount, while closing costs don’t affect your loan terms.
Should you save up before refinancing?
You may not have to save up for a refinance, depending on your situation, but it can be beneficial.
Closing costs, which are lender charges for processing the transaction, are often required when you refinance even if they’re not paid up front. Having the savings to help cover closing costs, along with a separate emergency fund, can be helpful. As a homeowner, you may already know things can break without warning.
Overall, a certain savings goal can help your financial flexibility ahead of a refinance. Saving up isn’t just for the upfront costs, either. It can give you time to improve your credit, which factors into your loan terms, and might put you in a position to negotiate your refinancing terms.
How much do you have to pay when refinancing?
Closing costs can generally range from 2% to 5% of a mortgage loan. However, costs can vary depending on the lender and the applicant. As with many forms of credit, your financial information and credit profile are considered during underwriting. Shopping around for mortgage lenders with different fee structures, qualification criteria or refinancing requirements can change the upfront and monthly costs of your refinance.
Can you avoid closing costs when refinancing?
Lenders have different structures, terms and qualification criteria, so it may be possible to refinance without paying closing costs. One option is a no-closing cost refinance, which is when the lender rolls your closing costs into the new loan. Technically, you don’t pay up front, but you still pay the fees. Another option may be accepting lender credits, where the lender waives closing costs in exchange for a higher interest rate.
Additionally, with any amount of closing costs is a break-even point. This is how long it will take for you to recoup what you pay up front. For example, if you pay $6,000 in closing costs, and your monthly mortgage is $200 lower, you may break even after 30 months (2.5 years). Technically, you’re saving on your monthly mortgage, but the real savings can begin once you break even on the closing costs.
How to refinance your mortgage
There will be a few more details along the way, but here are several key steps to refinance your home:
- Gather documentation: Having a clear budget and the common financial information a lender will request can make refinancing more straightforward. Bank statements, tax returns and current mortgage details are usually helpful to have on hand when you start your refinancing search.
- Research lenders: Depending on your goals, different offerings may be more appealing than others. For example, if you’re only looking to lower your monthly payment, you might pick the lender that offers you the right combination of interest rate and loan term. However, closing costs are a factor that can vary by lender. If you find a lender that doesn’t charge much up front, that could help you absorb higher monthly payments than you were hoping for.
- Apply for the loan: This process is similar regardless of your chosen lender. However, it might be faster if you go with your lender. They might preapprove your refinance but eventually require you to formally apply for the new loan. Either way, if you’ve gathered important documents and found refinancing terms you like, you’re ready to apply.
- Get an appraisal: Lenders often require an appraisal to confirm your home’s value. The resulting LTV ratio can affect your interest rate, mortgage insurance requirement and approval chances. LTV also determines how much equity you have in your home, which can qualify you for a cash-out refinance, where you borrow against your home’s value to receive cash.
- Agree to terms and close the loan: The final loan estimate will be based on the appraisal. You might have some final terms to discuss with the lender before closing; however, because you already own the home, there’s no final walkthrough or sellers to settle with. You can sign the documents when you’re ready to and pay any closing costs. As long as your keys don’t get lost in the meantime, you can enjoy your refinanced home.
In summary
As with most financial decisions, there are pros and cons to refinancing your mortgage. Refinancing your mortgage does not require a down payment, but you will typically need to pay closing costs, which usually range from 2% to 5% of the loan amount. To qualify for refinancing, mortgage lenders generally require a minimum credit score, specific LTV ratio, proof of income and a current mortgage in good standing. Saving up for closing costs and improving your credit may help you secure better refinancing terms and financial flexibility.
Besides meeting the requirements, you may want to ask yourself several other questions before refinancing.
