Many homeowners with mortgages have considered refinancing at some point or another. Refinancing a mortgage essentially replaces your current mortgage with a new loan.
Refinancing is an especially enticing choice for people who want to lower their interest rate, reduce their monthly payments, pay off the loan faster, tap into home equity, or turn an adjustable-rate mortgage into a fixed-rate loan.
But hold on. Sherry Graziano, SVP, mortgage transformation officer at SunTrust in Orlando, FL, says that just because rates are at historic lows doesn’t mean that refinancing is the right decision for everyone.
“Before beginning conversations with lenders, the homeowner should have a clear financial objective and see refinancing as way to achieve that objective,” she says.
Once you’ve decided that refinancing is worth exploring, find a mortgage representative who can clarify the financials and explain all your options. While you’re discussing this, it’s important to ask the right questions—and lots of them.
Think you’re ready to refinance your home? Before you jump in and start the refinancing process, here are some questions you should plan to ask your mortgage lender.
1. ‘Does my quote include taxes and insurance?’
When applying for a loan, a lender will provide an estimate that gives a breakdown of all closing costs, the rate, and all other related costs with the loan.
Jeremy Engle, a mortgage lender with Vero Mortgage in Visalia, CA, says the lender’s quote usually includes taxes and insurance. “I ask clients for a current copy of their mortgage statement, and I can pull the figures from that,” he says.
Lenders will typically provide a detailed quote that will break down the new monthly payment, and it should highlight taxes and insurance, according to Graziano. She says homeowners may also want to ask about the associated fees—both the lender’s and other third parties’. “Typical costs may include an appraisal fee, credit report, title insurance, and closing or attorney’s fees,” Graziano says.
2. ‘How much money do I need to bring to closing?’
On average, homeowners can anticipate paying 2% to 3% of the loan amount to refinance a mortgage. So refinancing a $300,000 home loan, for example, could cost $6,000 to $9,000 and would be due at or before closing. Just as with your current home mortgage, the refinancing process will also include closing fees.
Communicate with your lender and ask what you need to bring to the closing table. Closing costs can include a variety of fees—bank, appraisal and attorney fees—for the services and expenses needed to finalize a mortgage.
When it comes to how much to bring to closing, it depends on the loan the borrower is looking to acquire and is unique to each borrower’s financial situation, according toTarek Hassieb, a licensed real estate broker for Liberty Realty in Hoboken, NJ.
“If they want a lower payment, they’ll bring the appropriate funds to satisfy the payment they feel comfortable with. A borrower can essentially bring zero dollars to closing and add the closing costs to the loan, and bring nothing to the closing table,” says Hassieb.
Graziano says lenders offer different terms and promotions, and it is worth reading through all the documents.
3. ‘What are my out-of-pocket costs?’
Discuss with your loan officer any additional fees you may be responsible for that are not included in your closing fee estimate. These may be included as separate costs, such as insurance and a property survey. Out-of-pocket costs vary, depending on each buyer’s situation.
“While some homeowners may opt to pay out of pocket for some expenses, many will choose to roll their refinancing costs into the loan,” says Graziano. “Homeowners should be clear about whether or not the lender offers them that option.”
4. ‘Do I have room to cash out any equity?’
Most lenders prefer to see some equity if you are to qualify for a loan. Usually, the more equity there is in a home, the easier it is to refinance. Experts say at least 20% equity is needed if you don’t want to pay private mortgage insurance. However, even with less, you can still refinance, but the terms may not be as favorable. Hassieb says that since each buyer’s loan may be different, this would be assessed on a case-by-case basis.
5. ‘How long is the term of the loan that you are quoting me?’
When you refinance, you will have a new term and amortization schedule. Each time you refinance your property, the clock is reset for the term length. “The loan would restart to Day One. So consider it a new loan. A borrower can choose a term from 10 years up to 30 years,” says Hassieb.
The cost to refinance a mortgage can vary based on such factors as interest rate, credit score, loan amount, and lender. As a homeowner, if you want to get a better mortgage refinance deal, you should shop around and make lenders compete for your business.
Hassieb says most lenders have an online link to a refinance pre-approval that can help the lender understand the borrowers’ financial situation and help them achieve their financial goals.
