11 questions to ask when refinancing your mortgage

Choosing a new mortgage lender when refinancing takes more than an online search, it’s an important decision that helps shape your financial future. The financing partner you choose influences your potential loan products, interest rates, and the guidance you receive throughout the refinancing process. Fortunately, some straightforward questions can help you find your way to an ideal mortgage lender.

If you’re ready to refinance your home for any reason, the first step is to learn more about how refinancing works. Then, you can ask these key questions to ensure the lender is a good fit for your financial needs.

1. What types of refinance loans do you offer?

You can choose from multiple types of home loans when refinancing your mortgage. In addition to refinancing to lower your interest rate or monthly payment, you may want to refinance with a completely different type of home loan. For example, you may want to refinance from an adjustable-rate loan to one with a fixed rate and payment, giving you more predictability. Or you may want to convert from an FHA loan to a conventional mortgage once you reach 20% equity in your property, which allows you to stop paying for private mortgage insurance (PMI).

Some common mortgage refinance loan types you might see include:

• Conventional loan: The most common type of loan, conventional loans conform to Fannie Mae and Freddie Mac’s guidelines.
• VA loan:Department of Veterans Affairs (VA) loans are government-backed loans for qualifying members of the armed forces, veterans, and surviving spouses.
• FHA loan:Federal Housing Administration (FHA) loans are government-backed and have lower income and credit requirements than conventional loans.
• USDA loan:U.S. Department of Agriculture (USDA) loans are government-backed loans that allow you to buy a home in a qualifying rural or suburban area.
• Jumbo loan: A jumbo loan finances home purchases above local conforming loan limits. The limit varies based on the property’s location. Loan limits may also increase depending on the number of units in a property.

Not every lender offers every type of loan, so you may have to shop around to find the best fit. Asking what types of loans are available can help you quickly decide if a lender supports what you’re looking for with a refinance.

2. Does it make sense to use a rate-and-term or cash-out refinance?

When refinancing, you’ll encounter two standard options. The first is a refinance that adjusts your mortgage rate and term, and the second allows you to receive cash upon completing the refinance.

• Rate-and-term refinance: As the name suggests, a rate-and-term refinance changes the rate and term of your mortgage loan. Your refinanced mortgage rate is the percentage you pay in interest on your home loan. Your mortgage term is the length of time you have to repay your home loan. For example, you can refinance a 30-year mortgage to a 15-year mortgage. When you refinance your rate or term, your monthly payment and total interest cost change while your principal balance remains unchanged.
• Cash-out refinance: With a cash-out refinance, you take out a loan with a higher balance than your existing mortgage to withdraw cash from your home equity. For example, let’s say the principal balance on your mortgage is $100,000, and you want to pay for a $20,000 home improvement project. A cash-out refinance would allow you to take out a loan worth $120,000, and your lender would give you $20,000 in cash.

Ask your lender about the types of refinances they offer. Then, ask about the benefits and drawbacks of each. Savvy homeowners only refinance when they understand the reason they’re refinancing and how it will benefit them financially.

3. What do I need to qualify for a refinance?

Every lender has criteria you must meet to qualify for a refinance. Ask your lender what standards you must meet in the following areas:

• Credit score: Your credit score is a three-digit number that helps lenders assess your likelihood of repaying a loan as agreed. A history of on-time payments and responsible loan management should help improve your credit, while late payments, missed payments, charge-offs, and high credit card balances tend to lower your credit score.
• Debt-to-income ratio (DTI): Your DTI tells your lender how much of your income goes to recurring monthly debt payments. High minimum payments compared to your income indicate a risk that you may struggle to afford a new mortgage.
• Home equity: Home equity is the portion of your home you own after considering loan balances. For example, if you have a $500,000 home with a $400,000 loan, your home equity is $100,000, or 20%. Depending on your lender and the specific loan program, you may need to meet a certain home equity percentage to qualify for a refinance loan.

4. How much equity can I convert into cash?

For conventional loans, most lenders require homeowners to leave at least 20% equity in their property, which may affect your refinancing goals. But with certain programs, notably VA loans, you can borrow up to 100% of the home’s value. Ask your lender how much of your available equity you can access through a refinance. Compare your lender’s percentage to the equity in your home to determine if it’s sufficient to reach your financial goal.

You may need to shop for a different lender or reconsider your refinance if you can’t cash out enough equity to reach your goal, such as paying off debt or financing a home improvement. Over time, you should see your home equity rise as you pay down your mortgage or if the value of your home increases.

5. What’s the difference between interest rate and APR?

The terms “interest rate” and “APR” are often used interchangeably. However, the truth is that APR and interest rates aren’t actually the same thing. The interest rate is a percentage you pay based on your total mortgage balance. Your annual percentage rate (APR) is your interest rate plus any applicable fees and closing costs associated with the loan.

When you see the two percentages listed side by side, APR is almost always a higher number. If you want to compare the costs of multiple loans, the APR is usually the best way to do so.

6.  Do you offer rate locks?

Mortgage interest rates typically fluctuate daily and can change significantly depending on economic and market trends. Refinancing takes less time than closing on your first loan, but a refinance can still take days or weeks to finalize. A rate lock allows you to lock in your interest rate while your loan moves through the closing process. A rate lock can protect you against increases in market interest rates and keep your loan costs predictable.

Ask your lender if they offer rate locks. If they do, ask how long you can lock your rate for and if locks are free. You should also ask about the cost to extend your rate lock if your refinance takes longer than expected, and what happens if rates go down between the rate lock and closing.

7.  How will refinancing affect my monthly payment?

When you refinance, you should expect a different monthly payment in the future. The type of refinance loan, as well as the rate and term, can have a significant impact on how much you’ll owe each month.

Your monthly payment will decrease if you refinance to a lower APR and keep the same term. If you refinance to a longer term, your monthly payment will be lower, but you’ll pay more interest over time. If you refinance to a shorter term, your monthly payment will increase, but you’ll own your home sooner. Your monthly payment usually increases when you take a cash-out refinance.

Ask your lender how your refinance will affect your monthly payment. Your lender should be able to review your loan details and provide a close estimate of your monthly payment. A refinance calculator can also help you compare different interest rates and terms to get an idea of what you’d pay with a different potential loans.

8.  Will I need to pay PMI?

If your refinance leaves you with less than 20% equity in your property, you may have to pay private mortgage insurance (PMI). PMI partially insures your lender in the event of a loan default. PMI can considerably increase your monthly payment, so be sure to ask your lender if they have a PMI requirement.

If you’re close to 20% home equity, you may also want to know about options to drop PMI once you reach that level. If you’re looking at a cash-out refinance that might take you below 20% home equity, you might want to ask your lender the maximum you can borrow without a PMI requirement.

9.  Who will service my new loan?

Not all mortgage lenders service loans in-house. Many lenders sell the loans they close to other real estate financing organizations or investors, such as Fannie Mae or Freddie Mac. Some lenders sell the loans they close but retain the servicing. In that case, you make payments directly to the original lender each month.

Rocket Mortgage services nearly all of the loans it originates, with the exception of some jumbo loans. If you close a loan with Rocket Mortgage, chances are you’ll keep working with Rocket Mortgage to manage and pay your loan.

Working with a refinance lender that services your loan in-house can make it easier to get support if you have a question or concern about your loan. You can ask if the lender typically holds or sells its loans, and if it does sell them, if it usually acts as the loan servicer.

10. What types of closing costs should I expect?

In most cases, you’ll have to pay closing costs to your lender when you finalize your refinance, just like when you got your original loan. The specific closing costs you pay will vary based on where you live and the lender you choose.

The closing costs for the average refinance typically equal about 2% – 6% of the total loan value. Ask your lender what closing costs you can expect to pay. You should also ask your lender if you have the option to roll your closing costs into the principal balance of your loan or if you will have to pay them out of pocket.

11. What’s a Closing Disclosure?

Depending on when you got your original mortgage loan, you may already be familiar with the current required closing disclosures. You receive a Closing Disclosure from your lender 3 business days before you close on your refinance. It will include information about your loan term and APR, as well as a summary of the closing costs you are required to pay. You must acknowledge to your lender that you read and reviewed your Closing Disclosure before they can schedule your closing.

Ask your lender how you’ll receive your closing disclosure and how to acknowledge both receipt and approval. Also, ask your lender to walk you through the closing process. They should be able to tell you what to bring to closing, who will be there, and what will happen during closing.

The bottom line: Asking the right questions can help you choose the best lender

Asking the right questions when refinancing empowers you to partner with a lender you trust, secure the loan that fits your goals, and feel confident managing your mortgage long after closing.

Set yourself up for a smooth, successful refinance: carve out time to ask plenty of questions, explore multiple lenders, and trust your instincts as you shop for the best fit. Ready to take charge of your financial journey? Begin your online refinance application today.