10 questions to ask when refinancing your mortgage

Refinancing can be a powerful financial tool to help save you money or tap into your equity.¹ When you refinance, you replace your current mortgage with a new one that has better terms or allows you to access financing. Choosing the right lender to refinance will impact your loan options, interest rate, and the guidance you receive throughout the refinancing process. While you can refinance with your original lender, you can also choose a new lender if they offer better terms. Here are 10 questions to ask lenders to help you find the best one for your refinance needs.

1. What refinancing options do you offer?

Not every lender offers every type of loan, but it’s important to be aware of your options to find the best fit for your situation. Asking what types of loans are available can help you quickly decide if a lender supports what you’re looking to achieve with a refinance.

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.
• FHA loan: Federal Housing Administration (FHA) loans are government-backed and have lower income and credit requirements than conventional loans.
• VA loan: Department of Veterans Affairs (VA) loans are government-backed loans for qualifying members of the armed forces, veterans, and surviving spouses.
• 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.

You can choose to keep the same type of loan when refinancing your mortgage or you can refinance with a different type of home loan. For example, you may want to refinance from an adjustable-rate loan to a fixed rate and payment, giving you more predictable monthly payments. Or you may want to convert from an FHA loan to a conventional mortgage once you reach 20% equity in your property so you can stop paying for mortgage insurance.

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

There are two main types of refinances you’ll need to choose from depending on what you’re looking to accomplish. One type can help you adjust your monthly payment and loan term, while the other can help you access cash.

• Rate-and-term refinance: With a rate-and-term refinance, you can change your mortgage rate or your loan term. This is a popular option for those looking to reduce their monthly payment and their total loan costs. Refinancing to a lower interest rate or a longer loan term can help you save money each month – and overall – without adding to your loan balance. For example, if interest rates have dropped since you first took out your mortgage, you can refinance to a lower monthly payment.
• Cash-out refinance: With a cash-out refinance, you take out a loan with a higher balance than your existing mortgage to withdraw the difference in 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.

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

Just like your original home purchase, lenders will review your finances to confirm your eligibility for a refinance. Your credit score and debt-to-income ratio will need to meet your lender’s refinance requirements.

With refinancing, your lender will also need to determine how much equity you have in your home. Home equity is the portion of your home you own and can be calculated by taking your home’s current market value and subtracting what you still owe on the mortgage. For example, if you have a $500,000 home with a $400,000 loan, your home equity is $100,000, or 20%.

To calculate your equity, lenders will typically order a new refinance appraisal to determine your home's current market value.

4. How much equity can I convert into cash?

If you're looking to tap into your home equity with a cash-out refinance, lenders will require you to leave a certain percentage of equity untouched as a protective financial cushion. Before approving a cash-out refinance, lenders impose minimum equity requirements to protect you (and their investment) if property values fall.

The maximum amount of cash you can access depends largely on the type of loan you choose:

• Conventional: up to 80%
• FHA: up to 80%
• VA: up to 100%

If you find that you don't quite meet these minimum equity guidelines for a refinance, you still have other financing options. A home equity loan or home equity line of credit (HELOC) are second mortgages that allow you to borrow money using your home as collateral. While a second mortgage means a second monthly payment, the upside is you don’t have to touch your equity. While Rocket Mortgage does not offer HELOCS at this time, we do offer a Home Equity Loan. Get in touch with one of our Home Loan Experts to go over your options.

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

While the terms “interest rate” and “APR” are sometimes used interchangeably, they 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. Compare the costs of multiple loan options using their APR and interest rate to understand the total cost of your refinance.

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. Find out 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?

A common reason homeowners refinance is to reduce their monthly mortgage payment. However, this depends on the type of refinance and your new loan terms.

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 pay off your mortgage sooner. Your monthly payment usually increases when you take a cash-out refinance because you’re adding to your total loan balance.

Ask your lender how your refinance will affect 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?

When you refinance to a conventional loan and have less than 20% equity in your property, you will have to pay for private mortgage insurance (PMI) to protect the lender. If you opt for an FHA loan, you will have to pay an FHA mortgage insurance premium (MIP) regardless of your home equity amount.

Before you refinance, ask your lender the following questions about mortgage insurance:

• What are your rules for PMI?
• What is the maximum I can cash out without needing PMI?
• Can I roll the cost of MIP into the balance, or do I need to pay it monthly?

9. Who will service my new loan?

Mortgage servicing is the process of collecting your monthly payments, managing your escrow account, and providing customer service for your loan. Sometimes, the lender that originates your loan will sell the servicing rights to another company, which is known as a mortgage servicing transfer. This is perfectly common and can happen after a refinance as well.

If your mortgage servicing company does change, you’ll be notified at least 15 days in advance. From there, you’ll start sending your mortgage payments to your new servicer.

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.

10. What types of closing costs should I expect?

Just like your original home purchase, finalizing a new loan involves paying closing costs. Typical refinance closing costs range from 3% to 6% of your total loan amount and cover expenses like appraisal fees, title searches, and loan origination fees.

It’s important to understand your closing costs so that you can calculate how long it will take you to recoup the upfront costs of refinancing and begin saving. This is also known as your break-even point.

Your Closing Disclosure will itemize each of your closing costs and show the total amount you’ll be expected to pay to close on your refinance.

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

Refinancing can be a great tool to help you achieve a financial goal. Whether you're looking to reduce your monthly payment, tap into your home's equity, or adjust your repayment timeline, refinancing with the right lender can make all the difference. Be sure to take the time to ask your lender the important questions to make sure you can get the most out of your refinance.

If you’re looking to explore your options, speak to a Home Loan Expert who can answer all your lingering questions and help you get started today!

¹Refinancing may increase finance charges over the life of the loan.

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