Questions to Ask When Refinancing Your Mortgage

© 2009, Brandon Cornett. All rights reserved.

 

Before you try to refinance your home, you need to research the process from start to finish. You also need to assess your financial situation, credit score, level of equity, etc. Asking questions of yourself and your lender is a good way to conduct this kind of research, and you should do it at every step of the way. Here are some of the key questions you should ask when refinancing your mortgage loan:

Questions You Need to Ask Yourself

I see a lot of articles like this one online, but many of them only tell half the story. They give you a list of questions to ask your lender when refinancing, but they neglect the questions you need to ask yourself. Smart homeowners will start this process by doing plenty of research on their own, long before they start talking to lenders. Here are some of the questions you should ask yourself at this early stage.

1. What are my refinancing goals?

What are you trying to accomplish with your mortgage refinance? Are you simply trying to lower your rate and save money in the future? Switch from an ARM loan to a fixed-rate loan? Pull some cash out along the way? You need to ask (and answer) these refinancing questions early on, so you can have clearly defined goals. Later, when you start getting offers from lenders, you’ll be able to evaluate those offers to make sure they accomplish your goals.

2. Am I upside down in my mortgage loan?

This is an obstacle for a lot of homeowners right now. After the economic recession that hit us in 2009, more than 12 million homeowners became upside down in their mortgage loans (which means they owed more than their homes were worth). If you live in an area that suffered big drops in property values, this is another refinancing question to ask early on. So find out how much you currently owe on your mortgage, and compare that number to your home’s current value.

3. Do I have enough equity?

This is a follow-up to refinancing question #2 above. Once you have determined your equity, you’ll have a better idea if a refinance loan is possible. In the current economy, most lenders will require at least 20% equity on refinancing loans. The lender will send an appraiser out to appraise the money, for this very reason. Some homeowners will measure their own equity, before dealing with lenders. Others homeowners will just wait until the lender’s appraiser comes out. How you go about it is up to you, but you need to ask this question at some point.

4. What is my current credit score?

Times have changed. Lenders today have tougher criteria for refinancing, and the credit score is one of those checkpoint. You’ll need a solid credit score in order to get approved for a refi loan. It’s something that varies from lender to lender, so it’s hard to say what score you need across the board. But if you want to qualify for the best rates the lender has to offer, you’ll probably need a FICO score of 750 or above. This is an important question to ask early in the refinancing process, because it takes time to improve a credit score. So check yours today, and make whatever improvements are necessary — before you apply for a refi loan.

Questions for Your Lender

So let’s assume you have asked all of the questions listed above, and you feel you’re a good candidate for refinancing. Now it’s time to switch gears and ask certain questions of your lender. Here are some items that should be high on the list.

5. Am I a good candidate for refinancing?

Before you start asking about interest rates, closing costs and other details, you need to find out if you’re even a candidate for refinancing the home. As we have discussed, there are several obstacles to refi — you need to have enough equity, a sufficient credit score, etc. So your first question for lenders is: “Do I even qualify for a refinance loan?”

6. What interest rate can you offer?

If the lender tells you you’re a good candidate for refinancing, the next thing you need to know is what interest rate they’re willing to offer you. Getting a low enough rate is the key to success with mortgage refinancing, because it will help you achieve the goals you established in question #1 above. More than anything else, the interest rate on the new loan is what makes refinancing worthwhile — or not. You have to lower your rate enough to accrue sufficient savings over the life of the new loan, and those savings must exceed the amount you pay in closing costs (see next question below).

7. How much are the closing costs?

You need to get an accurate estimate of your closing costs when refinancing your mortgage. These costs are a critical piece of the puzzle, because they might make a refinance loan cost-prohibitive. In others words, if you pay more in closing costs than you save over the life of the new loan, then it doesn’t even make sense to refinance the home.

8. How much will I save over time?

Once you know the interest rate on the new loan, and the full cost of closing, you can use a refinance calculator to determine your savings. This will also tell you how long you have to stay in the home to pass the break-even point — the point where your savings begin to exceed your costs. You can find plenty of these calculators online by doing a Google search.

These are not the only questions to ask when refinancing your mortgage loan, but they are some of the most important. I recommend that you continue your research beyond this website, until you fully understand how the refinance process works. By understanding all of the key steps, you’ll be able to ask all of the right questions. And that’s the key to success. Good luck!