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How to Refinance in California: A Guide for Homeowners
Over the past two years, home prices have risen gradually in most California cities. This has increased home equity for a lot of homeowners, putting them in a good position to refinance.
Summary: This guide explores the mortgage refinancing process in step-by-step fashion. It also explains some of the reasons why homeowners refinance and when it makes sense to do so.
Mortgage Refinancing Defined
Mortgage refinancing occurs when a homeowner replaces their existing home loan with a brand new one. You’re basically trading in your current mortgage for a different one that better suits your current financial goals.
The refinancing process is structured so that the lender providing your new mortgage directly uses a portion of the loan proceeds to satisfy and close out your old mortgage.
In some cases, the remaining funds can be provided to the homeowner to use as they see fit. This is what’s known as “cash-out refinancing.”
But not all homeowners in California use the cash-out method. Some refinance in order to secure a lower monthly payment, without converting any of their equity into cash.
The specific goals and motivations can vary from one homeowner to the next.
Why Homeowners Refinance Their Mortgages
People choose to refinance their homes for a variety of reasons, but they all have one thing in common. The homeowner is trying to improve their financial situation in some way.
Common motivations include securing a lower interest rate, which can reduce monthly payments and overall interest paid over the life of the loan.
Homeowners might also refinance to shorten the loan term (e.g., going from a 30-year to a 15-year mortgage), tap into their home equity for cash, or switch from an adjustable-rate mortgage to a more predictable fixed-rate loan.
Key point:Â Refinancing is a tool that California homeowners can use to manage their debt and leverage their home equity to achieve specific financial goals.
What the Process Looks Like
While the refinancing process can vary among homeowners, it usually includes the following steps:
- Determine why you want to refinance (lower rate, shorter term, cash out, etc.).
- Gather your financial documents like tax returns and bank statements.
- Research the different types of refinance loans, like rate-and-term or cash-out.
- Review offers, choose a lender, and complete a standard loan application.
- Examine the Loan Estimate document to understand your closing costs.
- Finalize the loan paperwork and officially close on your refinance.
- The new loan gets funded and the old loan is paid off in full.
- You’ll begin making payments under the terms of the new loan.
Key point: The refinancing process allows you to replace an existing mortgage with a new one that has a different interest rate, a different structure, and possibly a shorter term as well.
A Deeper Dive: How to Refinance in California
The refi process can vary slightly from one borrower to the next. But the process is generally the same across the board.
Here’s how to refinance a home loan in California:
1. Identify your goals and objectives.
The first thing you need to do is determine your reason for refinancing your home. What do you hope to get out of it? What are you trying to accomplish?
Answering these questions will help you determine whether or not it makes sense to refinance.
Homeowners in California refinance for different reasons.
- Some do it to shorten the term and pay off their mortgage loan sooner.
- Others do it to convert some of their home’s equity into cash, with a “cash-out” refi.
- But most homeowners refinance to lower their mortgage rate and monthly payments.
The question you need to ask yourself is, what is my primary goal for refinancing? Once you know that, you can move on to the next step in the process.
2. Determine if you will benefit from refinancing.
At this point, you should have a specific financial goal in mind. Now you have to figure out if you can accomplish that goal by refinancing your home.
Let’s assume your primary goal is to reduce your monthly payments. In that case, you need to make sure you can secure a lower rate and save enough money over the long term to make up for your closing costs.
If you are refinancing to convert some of your home equity into cash, you’ll need to know the current market value of your home. Because that’s what determines your equity position.
Remember: You only want to refinance your home if it makes sense and supports your objectives. That’s the point of this preliminary homework.
3. Gather your financial documents.
Remember all of the paperwork you had to round up when you first took out your mortgage loan? Homeowners have to do the same thing when refinancing a home in California.
You might have to provide recent tax returns, W-2 forms, bank statements and pay stubs.
Refinancing homeowners usually have to show their most recent mortgage statements, as well. These are some of the commonly requested documents during the mortgage refinance process in California.
If you choose to work with Bridgepoint Funding, we will provide you with a list of documents needed. So there won’t be any guesswork on your end.
4. Submit a loan application.
Anyone using a mortgage loan to purchase or refinance a home in California must submit a standard loan application.
The official name for this document is the “Uniform Residential Loan Application,” or URLA. You can Google that name to see a sample document online.
The loan application form requests basic information about you, your employment situation, your income, and the home that’s being refinanced.
5. Get a home appraisal.
When you refinance your home, the bank or mortgage lender will have the property appraised to determine its current market value. This is done to ensure that the home is worth enough to justify the loan amount.
Generally speaking, California homeowners must be in a positive equity situation in order to qualify for a basic mortgage refinance loan. And that’s where the appraisal comes into the picture.
As a homeowner, there’s really not much for you to do at this stage. The lender will request the appraisal and report the results back to you. The point to remember is that the home must be appraised before the refinance can be finalized.
6. Sign your closing documents and pay your costs.
California refinance loans usually come with closing costs, just like their purchase-related counterparts. Basically, any time you purchase or refinance a home using a mortgage loan, you’re going to encounter certain charges and fees.
As a current homeowner, you’re probably familiar with some of those costs. They include credit reporting fees, home appraisal fees, mortgage processing fees, and more.
There’s also some paperwork that needs to be signed when refinancing a home in California (though not as much as when you first bought your home). There’s no property transfer taking place, so there’s less paperwork with a refi compared to a purchase. But you will have to sign some documents to close the deal.
Once you sign all the paperwork and pay your closing costs, you have successfully refinanced your home!
Have questions? Bridgepoint Funding has been serving the mortgage needs of California homeowners for nearly 20 years. We can answer any questions you have about refinancing a home loan in the Golden State.
