Questions to Ask When Refinancing Your Mortgage

Refinancing your mortgage can be life-changing. It might mean you pay less per month on your mortgage, reduce the total interest you pay throughout your loan or perhaps cash out some equity to reduce other debt or complete home renovations that upgrade your living space.

Regardless of your reasons for refinancing, ask refinancing questions before selecting your lender. This ensures a smooth process with good loan terms and that you maximize your refinancing benefits. Learn what you should ask your lender and why.

13 Refinancing Questions 

Asking the right questions will ensure you know how refinancing works and what you commit to. 

What Are My Refinancing Options? 

When you refinance, there are two main types:

• Rate-and-term refinances: A loan rate is the percentage of interest you pay. The term is how many years you’ll pay on your mortgage, such as 15 or 30. When you refinance for a new rate and term, you’re likely lowering your interest rate and shortening the time you’ll pay the loan.
• Cash-out refinance: You can access the equity you’ve built in your home with a cash-out refinance. With this loan type, you pull equity from your home, thereby increasing your loan amount. For example, if you currently owe $100,000 on your mortgage on a $400,000 home, you can access up to $220,000 in equity (the home’s value, minus the outstanding loan, less 20% of the home’s value). This enables you to use the funds to renovate the home, pay off higher-interest debt, use the funds to purchase a second home, or for any other use cases that might apply to you.

What Do I Need To Qualify For a Refinance?

Each lender will have varying criteria for a mortgage refinance. Learning what’s involved before applying can prevent multiple credit checks as you shop for a lender that matches your finances. Some common criteria you should know about include:

• Credit score: Many lenders will tell you the minimum credit score you need to qualify for various loan types.
• Debt-to-income ratio: Few lenders take on borrowers with a debt-to-income (DTI) ratio higher than 36%. Your DTI is the amount you owe in other debt divided by your annual income. 
• Home equity: To find how much equity you have in your home, look at its current estimated value minus what you owe on it. If your home has appreciated significantly since you bought it, you might have thousands of dollars of equity that you can access with a cash-out refinance.

What Is the Difference Between APR and Interest Rate?

Although you might see the terms APR and mortgage interest rates used interchangeably, they differ. Your interest rate is the base percentage of your loan, but the APR is the base percentage plus applicable fees. The APR will always be a higher number than the base percentage. However, because the APR is a more comprehensive number that tells you the total loan cost, you should pay more attention to this number than the interest rate.

How Much Will I Have To Pay For Refinancing? 

While a mortgage refinance can save you money in the long run, it isn’t free initially. You’ll likely be responsible for the following fees and expenses:

• Appraisal fee
• Title services
• Application fees
• Loan origination fees

Consider the total cost of refinancing to ensure it will pay off in the amount of time you’ll live in the home. If you only plan to be there a few more years, seeing a payoff in your refinance is less likely.

How Much Equity Can I Cash Out?

Most lenders do not allow you to cash out all the equity in your home. If you default on the loan, the lender will struggle to recoup those costs once they pay applicable fees and hire professionals to sell the home.

For conventional loans, you can likely not get a mortgage for more than 80% of the home’s appraised value. Let's look at an example to better understand how this applies.

If your home is worth $300,000, you cannot take out a mortgage for more than $240,000. Otherwise, you’d need to look into different loan types to see whether those might allow you to tap into more of your home’s equity. Just know that you’ll also be paying private mortgage insurance (PMI), making your loan more costly.

Evaluate whether the available equity meets your needs and makes the refinance worth it. For example, you might be completing the process to pay off high-interest debt, such as credit card debt. If you can’t pull enough equity from your home to accomplish that, the closing costs and fees might not be worth the refinance.

Does the Lender Offer Rate Locks?

Mortgage interest rates are constantly moving. As you go through the refinancing process, you might see major fluctuations in rate quotes since you can’t close your mortgage the same day you apply for it. A rate lock ensures that you pay the interest rate quoted to you at the time of closing. 

Ensure your lender provides rate locks and inquire if a fee is associated with doing a rate lock. A rate lock is especially important if you have a complex loan that will take some time to close.

What Are the Refinance Closing Costs?

Lenders charge closing costs to cover their expenses to provide the loan to you, such as staffing and technology. Closing costs vary from one lender to the next and are specific to the loan amount you seek. 

Depending on the loan amount and the area where the home is located, homeowners typically pay 2-6% of the total loan amount in closing costs. Some lenders allow you to include the closing costs in your loan’s principal to avoid a lump sum upfront when closing your mortgage.

What Is the Estimated Monthly Payment?

You want to ensure that you can afford the monthly payment you are committing to. If you’re refinancing at a lower rate for the same term, you should see a lower monthly payment. But if you shorten the term or increase your rate, the monthly payment will increase. 

With cash-out refinances, you generally pay a higher monthly payment, but many factors impact this. For example, if your home has appreciated significantly and you now have a great deal of equity, you might no longer owe private mortgage insurance (PMI), which can save you a hundred dollars or more per month.

Asking for an estimated monthly payment early in the process can help you decide whether to move forward with the loan or if your current mortgage is a better fit for your needs.

When Will I Break Even on Refinancing Costs?

Because you must pay closing costs for a mortgage refinance, you should carefully calculate the timeline for breaking even on the process.

For example, if you’ll pay $4,000 in closing costs but will save $100 per month on your mortgage payments, the loan has a 40-month payoff timeline. That means it will take three years and four months to start experiencing a financial benefit from the refinance. Ensure you’ll be in the home long enough to experience that benefit.

Will I Need a New Home Appraisal?

A home appraisal will cost you approximately $500-$600 depending on your area and your lender. This can increase the total cost of your loan and the timeline for when your loan will start paying off.

Ask your lender whether an appraisal is required based on your refinance preferences. If you’ll be leaving large sums of equity in your home, it’s less likely that your home will need an appraisal since the lender will know that your home is worth far more than the loan you’re taking out. But if your goal is a cash-out refinance, you’re more likely to need an appraisal so the lender ensures they are covered in case you default.

What Is a Closing Disclosure? 

As you near the closing date for your refinance, your lender will send a closing disclosure. This includes all loan details, including the loan term, APR and required closing costs. You must acknowledge and sign off on the closing disclosure before your lender will schedule your closing.

Many lenders now complete this process digitally, which means you’ll receive a PDF or online statement of your closing disclosure that you then e-sign to keep your loan moving forward on schedule.

What Types of Loans Are Available?

While you might have one loan type currently, changing loan types could save you money or offer a better rate. For example, if you bought your home with an FHA loan and now have 20% equity to qualify for a conventional loan, you can likely get better terms. Ask your lender about these loan types and whether you might qualify.

• Conventional loans are the most common because they meet Fannie Mae and Freddie Mac’s regulations. Your lender can sell your loan to these organizations to manage their cash flow, making them attractive to the lender.
• Government-backed loans: FHA, VA, and USDA are government-backed and have special qualification criteria. For an FHA loan, you’ll need to meet the income and credit requirements. VA loans are designed for military members and their families. USDA loans help you get good terms on loans for homes in rural or suburban areas that meet the criteria.
• Jumbo loans: In most states, you’ll need a jumbo loan if you need more than $726,200. Some states have a higher cost of living and, therefore, a higher threshold for a jumbo loan.

Can I Refinance With My Current Lender or Shop Around?

Most lenders offer refinancing options and you might experience the benefits of staying, such as in the case of specials that lenders offer current customers where they waive loan origination fees. However, you have no obligation to stay with your current lender and should shop around for the best rates.

Compare the Best Refinancing Companies From Benzinga’s Top Lenders

As you shop for the best mortgage loan refinance terms, consider these leading Benzinga lenders.

Improve Your Finances with the Right Mortgage Refinance

When rates decrease below your current mortgage rates, it’s a great time to refinance your loan to improve your finances and decrease the total cost of your loan. You have many factors to weigh before completing a mortgage loan refinance so be sure you’re asking your lender these crucial questions that will help set you up for greater success with your loan.

Frequently Asked Questions