11 Questions To Ask When Refinancing Your Mortgage

It’s important to choose the right lender when you refinance your mortgage loan. The lender you choose will determine which products you’re eligible for, your interest rate and more. But which lender is right for you?

You’ll have an easier time choosing the lender that best fits your needs when you know which questions to ask. Below, we go over 11 questions you might want to ask to learn how refinancing works and what you should be on the lookout for.

1. What Types Of Refinance Loans Do You Offer?

Multiple types of home loans can be used to refinance a mortgage. In some instances, borrowers may benefit from refinancing their current loan into a different loan type. For example, many homeowners with an FHA loan refinance to a conventional mortgage once they reach 20% equity in their property, allowing them to remove the FHA’s mortgage insurance requirement.

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 eligible members of the armed forces, veterans and qualifying surviving spouses.
• FHA loan: Federal Housing Administration (FHA) loans are government-backed and have looser income and credit requirements.
• 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. Rocket Mortgage® isn’t currently accepting USDA loan applications.
• Jumbo loan: A jumbo loan finances home purchases above local conforming loan limits. Usually, that’s $766,550, but it’s higher in Alaska, Hawaii and other high-cost areas. Loan limits also increase depending on the number of units in a property. It’s important to shop around because lenders often have their own standards and jumbo loan offers.

Not every lender offers every type of loan.

Identify your current loan type and ask your lender which types of loans they offer. Ask which types of loans would qualify for a refinance as well. Questions like these will help you get the most for your money and set you up for payment success.

2. Does It Make Sense To Use A Rate-And-Term Or Cash-Out Refinance?

There are different types of refinances. The two most common are:

• Rate-and-term refinance: Your 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. As the name suggests, a rate-and-term refinance changes the rate and term of your mortgage loan. For example, you can refinance a 15-year mortgage to a mortgage with a 30-year term. When you refinance your rate or term, your monthly payment changes 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 off $20,000 worth of credit card debt. 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.

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 represents your history of managing credit and loan repayment. Your lender should be able to tell you the minimum credit score you need to qualify for each type of loan.
• Debt-to-income ratio (DTI): Your DTI is a percentage that tells your lender how much of your money goes to recurring monthly expenses. You’re less likely to have savings and more likely to miss a mortgage payment if your DTI ratio is high. Your lender should be able to show you how to calculate your DTI and tell you the qualifying DTI percentage you need by loan type.
• Home equity: Home equity is the percentage of your loan principal that you’ve paid off. Most lenders require that you have at least some equity in your home before you can refinance. Your lender should be able to tell you how to figure out your current home equity as well as how much equity you need to qualify for a refinance.

4. How Much Equity Can I Convert Into Cash?

Except in rare circumstances, you can’t cash out 100% of your home equity. Most lenders require homeowners to leave at least 20% equity in their property, which may affect your refinancing goals. Ask your lender how much of your available equity you can cash out with a refinance. Compare your lender’s percentage to the equity in your home and see if it’s enough to accomplish your objectives.

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 luxury dream vacation. You may need to wait until you make enough monthly mortgage payments to meet your lender’s qualifying equity threshold.

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 these rates aren’t actually the same thing.

Your interest rate is the base percentage that you pay on your loan. 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 always the higher number. This means you should focus on finding lenders that offer the lowest APRs for comparable loan programs.

6. Do You Offer Rate Locks?

Mortgage interest rates change daily and can vary wildly depending on market trends. Refinancing takes less time than closing on your first loan, but a refinance doesn’t close in a day. A rate lock allows you to lock in your interest rate and keep the same rate while your lender closes your loan. A rate lock can protect you against changes in market interest rates and keep your loan 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.

7. How Will Refinancing Affect My Monthly Payment?

The type of refinance you choose will affect your monthly mortgage payment. 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 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 take a look at your loan details and give you a close estimate of what you’ll pay monthly.

8. Will I Need To Pay Private Mortgage Insurance (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 if you default on your loan. PMI can add considerable dollars to your monthly payment, so make sure your lender tells you if they have a PMI requirement.

9. Who Will Service My New Loan?

Not all mortgage lenders service loans in-house. Most lenders sell the loans they close on to ensure enough cash flow to continue offering loans. Some lenders sell the loans they close but retain the servicing. In that case, you make payments directly to your lender each month.

Try working with a refinance lender that will service your loan in-house. It makes it easier to get in contact with your lender if you have a question or concern about your loan.

10. What Types Of Closing Costs Should I Expect?

You must 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 on the average refinance equal about 2% – 6% of the total value of the loan. Ask your lender what closing costs you’ll likely pay. You should also ask your lender if you have the option to roll your closing costs into your loan’s principal balance.

11. What’s A Closing Disclosure?

Depending on when you got your original mortgage loan, you may already be familiar with the Closing Disclosure process. 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 and outline the closing costs you must 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 you must 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 when refinancing can help you choose a reliable lender, find the right loan for your needs and help ensure that you can manage your loan after you close.

Set yourself up for a successful refinance. Remember to take time to ask your lender plenty of questions and don't be afraid to shop around for lenders. Ready to refinance? Begin the approval process online today.