9 Best Questions To Ask When Refinancing Your Home

Making money make sense can be a challenge when the economy isn’t at its best. Whether you’re trying to consolidate high-interest debt, or you’d like to get rid of private mortgage insurance, refinancing your home’s mortgage could be the key that unlocks financial freedom for your family.

When a borrower refinances their mortgage, the lender pays off the existing mortgage with a new loan that has new terms. Depending on the type of refinance, these new terms can include a lower monthly payment or cash to make home improvements.

If you’re ready to refinance, keep reading. We’ve come up with some questions you’ll want to make sure you ask yourself and your lender before you sign on the dotted line.

Refinance Questions To Ask Yourself

Refinancing your home’s mortgage is a big step. Before you call your lender and get the ball rolling, it’s a good idea to go over your finances and establish a game plan. Below are a few questions to ask yourself to get started.  

1. What Is My Goal For The Refinance?

There are a few options to choose from when refinancing a mortgage and each will have a different financial result. Below are some common goals a borrower might want to achieve when they choose to refinance.

• Lowering their monthly mortgage payment
• Decreasing their mortgage loan interest rate
• Increasing the length of their loan
• Switching to a different type of loan
• Converting their home equity into cash

Asking yourself what you want to achieve with a mortgage refinance is a good place to start. Write down your needs and imagine where you’d like to be in 5 years. Would having a slightly lower monthly mortgage payment help you invest more in your retirement savings? Would building an addition add incredible value to your home and give you more space for your growing family? Your lender can’t answer these questions, but they will have strategies to help you get the results you’re looking for.

Choosing a refinance strategy doesn’t have to be stressful. Having clearly defined objectives will keep you focused on your short- and long-term financial goals. Having your goals written down will allow you to speak with your lender with confidence and make intelligent decisions based on your true needs.

2. What Type Of Refinance Would I Use?

Once you have an idea of what you would like to accomplish, it will be easier to communicate that to your lender. They can give you an estimate of costs and forecast how your refinance will impact your mortgage into the future. Below are some of the options you might discuss with your lender.

Rate-and-term Refinance

With a rate-and-term refinance a homeowner’s interest rate and loan term will change. The amount of the loan typically stays the same but monthly payments decrease due to less interest or a longer term, or both. If you’d like to pay less each month and the interest rates and terms offered can save you money, this may be the refinance option for you.

Cash-out Refinance

A cash-out refinance allows a borrower to take out a new mortgage for more than what they currently owe. The original mortgage is paid off and the borrower gets to keep the cash difference. There are qualifications that the borrower must meet and there must be sufficient home equity to qualify. For homeowners who need access to cash for home improvements or to pay off high interest debt, a cash-out refinance might be the right solution.

Cash-in Refinance

A cash-in refinance allows a homeowner to make a lump-sum payment during the refinance process so their new loan will have a smaller principal balance. Lenders often require borrowers to have at least 20% equity in their home to refinance. If the borrower has less than 20% equity to qualify for a better loan term, they can make a payment to reach 20% equity so they’re able to refinance.

Streamline Refinance

A streamline refinance helps homeowners with a government-backed loan lower their interest rate and reduce their monthly payment. If your existing loan is VA, FHA, or a USDA loan, you can qualify for a streamline refinance. You can also switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage with this type of refinance. You cannot take out cash using an FHA Streamline, so keep that in mind.

3. Are There Alternatives I Should Use Instead?

There are a few ways a borrower can leverage their home’s equity without refinancing their mortgage. If your goal is to simply reduce monthly living expenses, you could consider shopping for a new homeowners insurance provider.

Most people shop for the best rate and plan available when they buy their home. But they forget they can do this every few years for potential savings. Take an afternoon to gather quotes for homeowners’ insurance and see if your current rates can be beat by a new provider.

If you need access to a larger amount of cash, a home equity loan might get you the amount you need. Home equity loans provide borrowers with a large lump sum payment that they pay back in fixed installments over a predetermined period. Home equity loans are usually offered at lower interest rates than other consumer loans because they are secured by your home. Home equity loans are considered fixed rate loans, so the interest rate remains the same for the life of the loan.

For example, our friend Brynn would like to add an office addition to their home. Brynn has been saving and only needs to borrow $25,000 to complete the project. Their lender offers a home equity loan that they can pay back in installments with a fixed interest rate. Their lender also offers a cash-out refinance option that would require an appraisal and closing costs between 2% – 3% of the remaining loan principal.

Brynn decides to use a home equity loan instead of a cash-out refinance because their current mortgage interest rate is lower than the interest rate offered for a cash-out refinance. They will not have to pay closing costs either.

4. Can I Afford The Closing Costs?

Money is rarely free, so you should consider the cost to refinance before you sign anything at the closing table. Depending on the type of refinance and the terms offered, the closing costs may be too steep to make it all make sense. Below are some of the expenses that might be included in closing costs.

• Application fee
• Appraisal fee
• Attorney fees
• Title search and insurance

Borrowers typically pay 2% – 3% of their remaining principal in closing costs when refinancing a home. You may be able to roll closing costs into the new loan balance depending on the type of refinance being used and the lender’s requirements.

Some lenders offer a no-closing cost refinance that does not require any up-front cash to close. The borrower still pays closing costs, but they’re moved into the principal balance or exchanged for a higher mortgage interest rate.

This is where your lender can help you make the right decision for your specific financial needs. Have your lender provide an estimate of closing costs so you can evaluate whether you can afford to refinance or you need to find another more affordable solution.  

5. Do The Benefits Of A Refinance Outweigh The Costs?

If you’re wondering if a refinance is worth all the hassle, it may be helpful to calculate the breakeven point. The breakeven point is the point in time when a refinance begins to save a borrower money on the terms of the new mortgage.

To calculate a breakeven point, follow these simple instructions:

1. Total your closing costs: With your loan refinance estimates in front of you, compare the cost to refinance from lender to lender. To ensure you’re comparing apples to apples, make sure the estimate includes all the same fees, like the application fee, origination, appraisal, escrow charges, title costs, settlement costs and credit check.

2. Calculate savings: Look at the amount of your principal and interest payment on our current mortgage statement (before taxes and insurance). Subtract what the principal and interest payment would be according to the loan estimate for your new loan. This amount is your potential monthly savings. If your interest is projected to decrease, be sure to take that into consideration as well.

3. Determine the break-even point: Divide your closing costs by the amount you save every month. The result is the amount of time it would take you to break-even in months.

Let’s do the math together. If your loan estimate says you will save $100 per month by refinancing and the closing costs are estimated at $5,000. It will take 50 months – or a little over 4 years – to breakeven. If you plan to live in your home longer than 4 years, you’ll save money by refinancing now.

Refinancing Questions To Ask Your Lender

Now that you’ve reviewed your finances and you’ve got a goal in mind, it’s time to call lenders and explore your options. Below are a few questions you don’t want to forget to ask your lender when evaluating the best refinance option for you.

6. What Loan Products Do You Offer?

When speaking with a lender it’s a good idea to ask them what type of home loans they offer for refinancing. You’ll want to make sure the lender you choose has the home loan option you’d like to use. Below are some refinance loan types lenders may offer.

• Conventional loans: A conventional loan is a mortgage loan that is not guaranteed or insured by the government (like FHA or VA). This is one of the most commonly used home loan types.
• FHA loans: An FHA loan is a government-backed mortgage loan with looser financial requirements. This a great option for borrowers with a lower-than-average credit score.
• VA loans: A VA loan is backed by the U.S. Department of Veterans Affairs (VA). VA loans are available to eligible veterans, service members and qualifying surviving spouses. VA loans don’t require a down payment or private mortgage insurance (PMI) for qualified veterans. VA loans also typically have less stringent loan requirements as well.
• USDA loans: USDA home loans can be used for homes located in designated rural areas. Because these loans are backed by the government, lenders can offer low interest rates with low or no down payment requirements to borrowers with a lower-than-average credit score. USDA loans are great for borrowers struggling to save for a down payment and closing costs combined.

7. What Qualifications Are Required For A Refinance?

When discussing options with your lender be sure to ask what the qualifications are for the loan type you’re interested in. Each lender and refinance type will have their own required qualifications. Below are some of the most common requirements a borrower may need to meet before they’re approved for a mortgage loan refinance.

• Minimum credit score: Most lenders require a credit score of at least 620 to refinance to a conventional mortgage.
• Maximum debt-to-income (DTI) ratio: Most lenders prefer a borrower’s DTI sits at 43% or lower.
• Minimum loan-to-value (LTV) ratio: Most mortgage lenders allow borrowers to use 80% – 90% of their home’s equity for a cash payment. If your home’s equity is under 20% and you have a good credit rating, you may still be able to refinance but you may have to settle for a higher interest rate.

8. Can I Lock In My Interest Rate?

The good news is most lenders do offer some type of rate lock protection. Mortgage interest rates can fluctuate day to day and even hour to hour. A mortgage rate lock keeps your interest rate from rising between the time you apply to refinance and the time you close on your new loan. If interest rates happen to go up during the period when your rate is locked, you get to keep the lower rate.

If rate lock protection is something that is important to you, make sure you ask your lender if they offer rate lock protection. Most lenders charge a fee for this feature, so ask what the fee is and how their rate protection works.

9. Do You Offer Mortgage Discounts?

First-time home buyers aren’t the only borrowers who can use assistance programs. Ask your lender or credit union about mortgage points or assistance programs for refinancing. By simply asking the question, you may find you qualify to save money.

Another way to lower your monthly payment is by purchasing mortgage points. A mortgage point, or discount point, is a fee you pay to lower the interest rate on your refinance. One discount point costs 1% of your home loan amount. Purchasing a point means you’re prepaying interest, so your monthly payments are smaller. Points are paid for at closing and you’ll need to include the cost of points when calculating your cash to close.

The Bottom Line: Asking Questions About A Refinance Can Help You Better Prepare

We can’t stress the importance of being prepared when you’re ready to refinance your home. Setting clear and attainable financial goals will help you choose the refinance option that’s right for you. Whether you’re looking for ways to save on your monthly expenses or you need some cash now to build your home office, the equity you’ve built in your home can help.

If you’re ready to get started, apply online and find out what your home’s equity can do for you.