When refinancing a mortgage, it’s important to first ask your lender which method best suits your financial needs.
Finding the right lender to help you refinance your mortgage is critical if you want to set yourself up for financial success. A good lender should be able to answer all your questions clearly and thoroughly, always have your best interests at heart, and be knowledgeable at every step of the process.
To help you separate the good from the bad, we asked mortgage experts to share the key questions to ask a lender when refinancing your mortgage. You may have other questions based on your financial situation and long-term goals, but these should serve as a baseline to ensure your lender knows the basics of refinancing. This should ensure a smooth process with good loan terms that maximize your refinancing benefits.
What’s My Best Refinancing Option for My Financial Goals?
Before doing anything else, determine which refinancing method will work best for your long-term financial goals. With that, there are two main options: a rate-and-term refinance or a cash-out refinance.
“A rate-and-term refinance can lower the interest rate or shorten the loan length,” says Ryan Fitzgerald, owner of Raleigh Realty. “A cash-out refinance lets homeowners take money out of their home’s value.”
Here’s more information on the two main types of mortgage refinancing:
- Rate-and-term refinance: The rate is the interest rate you pay on a home loan. 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, 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.
“If finances have improved since the original mortgage, it may be possible to lock in better terms,” Fitzgerald says.
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 (DTI): Few lenders take on borrowers with a DTI ratio higher than 36%. Your DTI is the amount you owe in other debts divided by your annual income.
- Home equity: To determine 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 in equity you can access with a cash-out refinance.
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
- Closing costs
“These costs can add up, so it’s important to check if the long-term savings make up for them,” Fitzgerald says.
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.
Depending on the loan amount and the area of the home, 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 refinanced mortgage.
RELATED: What is a No-Closing-Cost Refinance?
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 typically cannot 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 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. However, the monthly payment will increase if you shorten the term or increase your rate.
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 PMI, saving you a hundred dollars or more monthly.
Asking for an estimated monthly payment early in the process can help you decide whether to proceed with the loan or whether your current mortgage better fits your needs.
Will I Need a New Home Appraisal?
A home appraisal will cost approximately $500-$600, depending on your area and lender. This can increase the total cost of your loan and the timeline for when it 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.
RELATED: How to Get a House Appraised for Free?
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 loans are government-backed and have special qualification criteria. You’ll need to meet the income and credit requirements for an FHA loan. 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 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.
Key Things to Ask Lenders About Refinancing
- When talking to a mortgage lender about refinancing, start with deciding which method works best for your needs and goals
- Once your refinancing type is decided, inquire about the eligibility criteria
- Discuss things like closing costs, whether you’ll need a home appraisal, and how long the process will take
- If your goal is to take equity from your home, ask how much money you can borrow with a cash-out refinance
- Inquire about a rate-and-term refinance if your credit score has improved. This can help lower your mortgage payments
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Ryan Fitzgerald, owner of North Carolina-based Raleigh Realty.
Frequently Asked Questions
How much are closing costs on a refinance?
Closing costs on a refinanced mortgage typically cost around 2-6% of the total loan amount.
What is the general rule for refinancing a mortgage?
The general rule for refinancing a mortgage is that you should do so if you can reduce your interest rate by at least 1%. However, that does not apply to all homeowners, so check with a financial planner before adjusting your rate or term.
What is the 3-7-3 rule in mortgage?
The 3-7-3 rule refers to a waiting provision in the Mortgage Disclosure Improvement Act. A lender has three business days to deliver the initial Truth in Lending Statement to the consumer, who must wait seven business days after the TIL disclosure has been sent before closing on a mortgage. Additionally, lenders must provide consumers with an accurate APR at least three business days before closing.
Sources
- Ryan Fitzgerald, owner of North Carolina-based Raleigh Realty
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.