17 Questions To Ask Before Refinancing

Refinancing your mortgage can be an effective way to restructure your finances, either to save money on your loan or to borrow cash against your home equity. But refinancing is a big financial decision. You’ll want to assess your goals, explore your options, and understand the process thoroughly to make sure refinancing can help you meet your financial goals.

Here are 17 questions to ask before refinancing your mortgage.

1. Why Should I Refinance My Mortgage? 

The biggest reason to refinance your mortgage is to save money, either in the short term or the long term. Common reasons why homeowners may want to refinance their mortgage include:

• To secure a lower interest rate.
• To get a lower monthly payment.
• To pay off their mortgage more quickly.
• To borrow cash against their home equity.
• To change their loan type.

“People should carefully consider their long-term objectives,” says Jerry Koors, president of Merchants Mortgage in Indianapolis. “For some clients, it is to get the lowest payment possible. For others, it may be debt consolidation. And (for) others, it could be to save interest and pay their home off sooner. Once that objective is set, then consulting with a mortgage professional on the best ways to achieve those objectives is the next step.”

2. What Should I Know About My Current Mortgage? 

Reviewing the terms of your current mortgage is important to understanding whether a mortgage refinance can help save you money. You’ll want to know how far along you are in paying off your loan, how much equity you have, and whether your loan has a prepayment penalty. Other key elements to review include:

• Your loan’s interest rate.
• Whether your loan has a fixed or adjustable interest rate.
• The length of your loan’s term.
• How much you still owe on your loan.
• What type of mortgage you have.  

3. How Much Equity Do I Need To Refinance?

Most refinance lenders want you to have a loan-to-value ratio of 80% or less, which means you need at least 20% equity in your home. Your LTV ratio is the amount you owe on your mortgage divided by your home’s value. Say your home is worth $400,000, and your current mortgage is $300,000. That means your LTV ratio is 75%, and your equity is 25%.

You could refinance with less equity — a conventional mortgage can be refinanced with 5% equity — but you’ll have a higher interest rate and need to pay for private mortgage insurance.

4. What Will Refinancing Cost Me?

Refinancing isn’t free, so it’s important to know what it costs. According to Freddie Mac, closing costs for a refinance typically total about $5,000. These fees typically include:

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

You also will need to purchase PMI if after refinancing with a conventional loan you have less than 20% equity. PMI typically costs between $30 and $70 per month for every $100,000 borrowed.

“Before refinancing, the customer should consider the total cost of the transaction and not merely rely on the payment savings,” Koors says.

5. How Do I Find a Good Lender?

You will want to shop around and compare mortgage offers from different refinance lenders to be sure you’re getting the best deal on the interest rate and fees.

A good way to do this is by applying for a mortgage with several lenders and comparing the loan estimates. The loan estimate is a standardized form that lenders are required to provide within three business days of receiving an application. It gives you all the details of the loan you’re being offered — including the estimated interest rate, monthly payment, and total closing costs.

You also can compare customer service and satisfaction reviews online to determine whether the company is reputable and easy to work with.

6. What Are the Downsides of Refinancing?

Like any major transaction, refinancing comes with trade-offs. Here are some scenarios where refinancing may cost more money than it saves you:

• If you refinance to a longer loan term, you likely will pay more interest overall — even if you get a lower interest rate that reduces your monthly payment.
• If you refinance to shorten your loan term, you’ll pay less interest and own your home free and clear more quickly, but you will have a higher monthly payment.
• If interest rates have increased or your credit score has dropped, you might be unable to get an interest rate low enough to save you money over your current mortgage.

7. How Will Refinancing Affect My Finances?

Refinancing is all about saving money. Think about how refinancing will affect your bank account and your monthly budget. Common short- and long-term effects of refinancing include:

• You may reduce your monthly payment.
• You may pay more in overall interest.
• You will make payments for a longer or shorter period.
• You have to pay closing costs to refinance.

8. What Are My Refinancing Options?

Common options for refinancing your mortgage include:

• Rate-and-term refinance. Sometimes known as a regular refinance, a rate-and-term refinance will pay off your old mortgage with a new loan that has a more favorable interest rate or loan term — without taking out cash and increasing your loan balance.
• Cash-out refinance. A cash-out refinance is taking out a new mortgage based on your home’s current value, paying off the balance of your current loan, and keeping the difference as cash. The amount you borrow is repaid as part of your new mortgage. Many homeowners use cash-out refinancing to pay for home improvements that may increase the value of their home or education expenses, or to consolidate high-interest debts such as credit cards.
• Cash-in refinance. Instead of increasing your total loan amount to borrow cash, a cash-in refinance lets you make a lump-sum payment that reduces your principal balance. That gives you a smaller, more affordable loan to pay off.

9. What Do I Need To Qualify For a Refinance?

While different lenders will have varying requirements, borrowers usually need:

• A solid credit score. If your credit score is high, you can score a lower interest rate. At a minimum, you should make sure your credit score hasn’t dropped, or you might not be able to get a better deal on a refinance.
• At least 20% equity. While it’s possible to refinance with less, you likely will be charged a higher interest rate and may have to pay for PMI.
• A low debt-to-income ratio. You’ll want to keep your DTI ratio low, as a high ratio can indicate you’re more likely to miss a mortgage payment. Use our DTI ratio calculator to figure out where you’re at.
• Financial documents. Your lender likely will provide you a mortgage refinance document checklist, which usually will include recent pay stubs, tax returns, current loan documents, and your monthly bank statements.

10. How Long Will It Take for Refinancing To Pay Off?

You have to pay closing costs to refinance your mortgage into a new loan that will save you money. That means it will take a while for the savings from your lower monthly payment to add up to more than what you had to pay to get the loan. This is known as the break-even point. For example, reducing your monthly payment by $75 sounds great, but the trade-off might not be worth it.

“If it costs $3,000 to do it, that is 40 monthly payments just to break even,” Koors says.

11. How Can I Save Money on Refinancing?

Common ways to save money on refinancing include:

• Changing your interest rate type. Refinancing from an adjustable-rate mortgage to a fixed-rate mortgage when interest rates are low can help you lock in that rate and monthly payment for the life of your loan.
• Changing your loan term. Refinancing to a shorter loan term will increase your monthly payment, but you’ll pay off the loan more quickly and pay less in overall interest.
• Consolidating your debts. Using a cash-out refinance to pay off high-interest loans or credit cards lets you save money by paying off those debts at a lower interest rate as part of your mortgage payment. Retiring those debts also will free up room in your monthly budget for other expenses.

12. How Long Will It Take To Refinance?

Refinancing a home typically takes 30 to 45 days, but that can vary depending on your financial situation and lender. For example, if your finances are complex and your income is more difficult to verify, it can extend the underwriting process. Other factors affecting how long it takes to refinance include scheduling appraisals and home inspections.

If you’re doing a cash-out refinance, you can expect to receive the money three to five days after closing.

13. What Is a Closing Disclosure?

A closing disclosure finalizes the details of your new mortgage. It explains your loan terms, estimated monthly payments, and how much you have to pay in closing costs. Your lender must provide a closing disclosure at least three business days before closing. It’s a good idea to compare your closing disclosure with your loan estimate to look for any errors and ensure you understand your loan.

14. What Type of Loan Should I Get?

Most lenders offer a variety of loan types, and each option is designed for different types of borrowers:

• Conforming conventional loans. A conventional loan is the most common type of loan. Offered by private lenders, it conforms to federal standards — including a maximum loan amount — that allow your lender to sell the loan to Fannie Mae or Freddie Mac.
• Jumbo loans. These are conventional loans that typically exceed the maximum loan amount for conforming loans. Jumbo loans usually are used to buy more-expensive homes, and the terms are up to the private lenders that offer them.
• Federal Housing Administration loans. Loans insured by the FHA are a good option for borrowers with lower credit scores.
• Veterans Affairs loans. VA loans are available only to qualified members of the military, veterans, and their surviving spouses.
• Department of Agriculture loans. Loans backed by the USDA are designed to help middle- and low-income borrowers buy homes in qualified rural areas.

15. What Will My New Monthly Payment Be?

Your total monthly payment is determined by the mortgage principal, interest payment, and additional costs paid with an escrow account, such as homeowners insurance and property taxes. You also may need to pay PMI. You can use a refinance or mortgage calculator to estimate your payment, which will be finalized in the closing disclosure.

16. What’s the Difference Between Interest Rate and APR?

Your interest rate is the cost to borrow money for your mortgage, and it’s expressed as a percentage rate. Your annual percentage rate is the interest rate plus any fees your lender charges for the loan. For that reason, your APR will always be higher than your interest rate and should give you a more complete idea of how much a loan will cost.

17. Should I Lock In My Mortgage Rate?

Mortgage rates change frequently, so the rate your lender quotes you today can change by the time you close on your loan. If you want to be sure the current rate is the one you’ll close with, you can pay a fee to your lender to lock your rate for a period that’s usually 30 to 60 days.

The Bottom Line on Questions To Ask Before Refinancing 

Refinancing can help you save a lot of money by getting you a better deal on a new mortgage. Just make sure you talk to a lender and figure out what works best for your situation. These talks should include the important questions to ask about refinancing, so you can be sure that your new mortgage is a better fit.

Jamie Johnson contributed to the reporting of this article.