Thinking about refinancing your mortgage? Even in a tough interest rate environment, there are scenarios where refinancing makes sense. In each instance, you’ll want to do your research to ensure the changes to your mortgage meet your financial goals.
To help clarify your goals with refinancing your mortgage, we’ve compiled the following questions to ask when refinancing a mortgage. By the end of this article, you should have a good idea of what you’ll want to change with your mortgage to help meet your financial goals.
20 Questions to Ask When Refinancing a Mortgage
1. Should I switch lenders?
It’s possible another lender could offer you better rates and terms, but it’s a good idea to check with your current lender. Your current lender will want to keep your business and may have incentives to offer you. In any case, shopping around when you’re refinancing is a good idea, and will only count as a single inquiry on your credit if you can do it within 45 days.
2. Can I switch loan types?
Changing your loan type could be an advantageous move. If you have an FHA loan, for example, you’ll always be paying mortgage insurance. A mortgage refinance to a different loan type can eliminate the mortgage insurance payment and save you money.
You do have to counter that with the possibility that the interest rate may be higher than your current mortgage rate, offsetting the savings. Be sure to do the math to make sure it’s a smart move.
3. What’s my new interest rate?
Refinancing a mortgage loan means you’ll get a new interest rate, which could be higher or lower than your previous mortgage. You may have heard it only makes sense to refinance when interest rates are lower than what you currently have. In many cases, that’s true, but if you need a large sum from a cash-out refi, need to remove a borrower from the loan, or have another situation where refinancing is necessary, you’ll still want to shop around to get the best interest rate possible.
4. What is my interest rate type?
When you refinance, you’ll have the option to change your rate type. The choice is usually between adjustable-rate mortgages (ARM) and fixed-rate interest types. With an adjustable-rate mortgage, you may initially have a lower rate, but the rate can change with market conditions. A fixed-interest rate mortgage stays the same for the life of the loan.
5. What’s my new term length?
Refinancing a loan could bring a new term length. If you want to pay your mortgage off faster, a 15-year mortgage could work. If you need to keep your monthly payment low, you may want to opt for a 30-year mortgage. If you can manage a slightly higher monthly payment, the 15-year mortgage is a great way to save money long-term.
6. What’s the new payoff date?
Take a look at the proposed new payoff date. Where do you imagine yourself being in your life at that point? Are you comfortable if you have to stretch the payoff date further into the future? Or does a quicker payoff fit better with your future plans? Consider how much the change will cost and whether you’re willing to accept that.
7. Will I be paying mortgage insurance?
Mortgage insurance is one of the fees on your mortgage you should get rid of as soon as you can. It only serves the lender, and if you have 20% equity or more, you should be able to drop it (sometimes without a refinance, depending on your loan type). If you’re refinancing and don’t have 20% equity, you’ll get a new mortgage and still need to pay mortgage insurance.
8. What closing costs will I pay and how much will they be?
You might be wondering what the fees for refinancing will be, or even, “Can I refinance for free?” The best answer lies with your lender. When you’re comparison shopping, get a loan estimate, which will disclose the interest rate, monthly payment, closing costs, and estimated costs for taxes and insurance for your new loan.
There are lenders that offer no-closing-cost loans, usually in exchange for higher interest rates or by adding closing costs to the loan. Compare these expenses to closing costs to see which is a better deal.
9. What will my new payment be?
Your mortgage payment will likely change, sometimes significantly depending on the interest rate you qualify for and the term that you choose. To get a good estimate of how that could change, use a mortgage calculator.
10. Can I afford the new payment?
Evaluate how the new payment fits in your monthly budget. If it’s too affordable, you may want to consider a 15-year loan. If it’s too much of a stretch, consider whether you really want or need to make a change.
11. Will I save any money?
The only way to know if you’re going to save any money on a refinance (if that’s your goal) is to:
• Calculate how much the mortgage is going to cost in total. The Consumer Financial Protection Bureau (CFPB) advises consumers to look at the cost savings of your monthly payment versus how much the loan will cost you in total. Even if you can get a lower interest rate and lower monthly payment, you could end up paying more for the mortgage if the mortgage term is longer.
• Calculate your break-even point. You can do this by dividing the closing costs by the amount you’ll save every month. If your closing costs are $4,000, and you’ll save $200 every month, then your break even point is 20 months. If you plan to stay in the home at least 20 months, then the amount is probably worth it if the total cost is also acceptable to you.
12. Can I refinance if I have less than 20% equity?
You can refinance if you have less than 20% equity, though you’ll still need to find the right loan and the right lender. You’ll have fewer options, as most lenders do look for 20% equity for refinanced loans. You may want to consider other financing methods where you can get equity out without refinancing.
13. Can I refinance without a credit check?
There are programs that offer refinancing without a hard credit check in all loan types, including: conventional, FHA, USDA, and VA. Take a look at the chart below for details on programs, qualifications, and what limitations you may encounter:
| Program name | Who and what qualifies? | Limitations |
|---|---|---|
| FHA Streamline | FHA-insured properties that are not delinquent | Cash out limited to $500, may have higher interest rate |
| Fannie Mae RefiNow | One-unit primary residences for borrowers at 100% or less of the area median income with up to 65% debt-to-income (DTI) ratio | Cash out limited to $250, fixed-rate loans only |
| Freddie Mac Refi Possible | One-unit primary residences for borrowers at 100% or less of the area median income with up to 65% DTI ratio | Cash out limited to $250, fixed-rate loans only |
| USDA Streamline Assist | USDA mortgages with no delinquent payments for 12 months prior | Income limits, must reduce the monthly amount by at least $50 to qualify |
| VA IRRRL | For existing VA loans that have been owner-occupied at one point | No cash out, cannot pay off a second mortgage, may pay closing costs |
14. Can I refinance multiple times?
It is possible to refinance multiple times, provided the numbers work out. You’ll need to qualify with your income, debt-to-income (DTI) ratio, and credit score each time. Keep in mind that the cost of refinancing each time may not make sense, so be sure to work out the numbers and consult with your lender on a solution that works for you.
15. How do I prepare for a refinance?
The best way to prepare for a refinance is by getting your finances in order. Check your credit score, your home’s value, and pay off debt where you can. Your personal qualifications are the biggest factor in getting a refinance with the best rates and terms.
16. What’s the purpose for the refinance?
You may be considering a refinance for any number of reasons, including to secure a lower interest rate, consolidate your debts, to take a cosigner off the loan, to pay off the loan sooner, to get rid of mortgage insurance, to change loan types, or to change interest rate types. If you are refinancing to pay for major expenses, consider that a home equity line of credit (HELOC) may be another option.
Turn your home equity into cash with a HELOC brokered by SoFi.
Access up to 95% or $500k of your home’s equity to finance almost anything.
Recommended: What Is a Home Equity Conversion Mortgage?
17. What are you sacrificing for this refinance?
Are you sacrificing a great interest rate so you can remodel the kitchen (and is that OK with you)? Are you pulling equity out of your home to give your monthly budget some breathing room? How much more will you pay over the life of the loan if you refinance? When you understand how amortization affects what you pay for the whole mortgage, it can help you make decisions that are better for your long-term financial health.
18. How does the refinance bring you closer to your financial goals?
A refinance should help you with your money or life. If there’s no benefit, you can walk away. If your goal is to separate your finances from a former partner, a refinance is essential to getting you closer to your goals. If your goal is to update your home, a refinance may be able to help you do that. Think about your goals, financial and otherwise.
19. Do I need cash out?
If you want cash refunded to you when you refinance with a new mortgage, you’ll want a type of loan called a “cash-out refinance.” You can use the cash to pay off debt, finish your basement, cover the costs of adoption, start a business, buy a boat, or nearly any other purpose you can think of. The CFPB does advise consumers to be judicious when taking cash out of their home equity.
20. Is this the right time to refinance?
There’s never going to be a perfect time to refinance, even when interest rates drop. But if your finances qualify you for a refinance and you’re ready to meet your next financial goal, then it might be a good time to refinance.
Why Asking These Questions Is Important
There are a lot of questions here, but if you’re clear on what you need and want, the refinance process will go more smoothly when you begin to work with your lender. You’ll be able to:
• Understand what options are available to you
• Grill your lender on important details
• Comparison shop and get the best deal
• Understand how a refinance will affect your finances
Deciding Whether to Refinance Your Mortgage
Refinancing your mortgage can be a great financial move, but it’s not right for everyone. Even after figuring out what you need and evaluating the options out there, you still might be worried about whether you’re making the right move or not.
That’s normal. A good lender can help answer any additional questions you have when refinancing your mortgage. They can help you see the different options available to you and what financial implications they may have.
Recommended: How to Get Equity Out of Your Home
The Takeaway
It can sometimes feel like there are as many reasons to refinance your mortgage as there are lenders willing to give you a loan. Asking yourself these questions can help you pinpoint whether a refinance is right for you, right now, given your specific financial and life circumstances.
SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.
FAQ
What is not a good reason to refinance a mortgage?
An interest rate drop isn’t by itself a good reason to refinance a mortgage. Refinancing should help you meet your overall financial or life goals. It won’t make sense in every situation, so it’s important to evaluate how changes in your monthly payments, loan term, and overall amount paid (including closing costs) will affect your finances over the long term.
What is a good rule of thumb for mortgage refinancing?
If it helps you meet your financial goals, a refinance could make sense. You may need a cash-out refinance to pay for a new roof. Or you may want to refinance to a shorter term with a better interest rate so you can pay down the home faster. Those are examples of how refinances can improve your financial situation.
What should you look out for when refinancing a home?
When you’re refinancing a mortgage, ideally you want it to benefit you financially. Bear in mind that a new mortgage with a lower monthly payment could still cost you more over time if you extend the loan term.
Photo credit: iStock/dusanpetkovic
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