People refinance their homes for a variety of reasons: to consolidate bills, to reduce monthly mortgage payments or to pay for medical or other unexpected expenses. The reason you wish to refinance your home will affect the type of loan you need.Once you have decided to refinance your house, it is essential that you understand how to refinance so you know what to expect.

Appraisal of Property

To begin the refinancing process, hire a professional appraiser to come evaluate your home. The appraisal can be done two ways, depending on what is most convenient for you as the homeowner. A drive-by appraisal assesses the value of your property from the curb; a full appraisal accounts for any improvements to the house when determining the value of the home. New interior or exterior painting, a new roof, new carpeting and a remodeled kitchen or bath are usually high-value remodels. You can expect to pay up to $500 for an appraisal. This appraisal will help you determine the loan-to-value ratio of your home.

Loan-to-Value Ratio

After the appraisal, you can determine the most important part of the refinancing process. The appraisal represents the value of your home, so compare this number to the amount you need to borrow to refinance. Typically, you cannot borrow more then the value of the home. For instance, if your home is appraised at $100,000, you cannot borrow more than $100,000. So loan-to-value ratio is often the make or break factor in determining if you qualify for a refinancing loan. Generally, the higher your ratio, the more of a risk you are to the lender. Bank of America says that for most refinancing, your ratio should be between 75 to 90 percent. A high loan-to-value ratio may result in higher interest rates or denial from a bank to refinance.

Loan Process

Now, you need to select a bank to refinance your home. Many people refinance with the bank that provided the initial mortgage, since this can be quicker because most of the paperwork is already in place from the original loan. However, you may want to refinance at a different bank that offers more favorable terms. When selecting a bank, compare interest rates, closing costs, fees, and terms and conditions. You'll also need to know whether the bank will give you a fixed rate or adjustable rate mortgage. If you have questions about any of the terms of the loan, ask a lawyer or trusted third party to help you with the documents. Once you select a bank, the remainder of the refinancing process is similar to what you went through when you first purchased your home. The bank checks your credit, the lender secures your loan, you sign the paperwork and you go to closing and pay some closing costs. A couple elements, however, may be different during the closing of a refinancing loan. For example, the lender may allow you to do the closing over the phone and often the closing costs are reduced slightly. Before closing, you will also have to retain an insurance binder so the house is covered via some type of temporary homeowner's insurance while the loan changes hands.

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Deciding to Refinance

Refinancing Step by Step