Mortgage Refinancing FAQ

If you already have a mortgage, you have probably heard about some of the benefits of refinancing. It can help you lock in a lower rate, reduce your term, and even cash out your equity for extra buying power. But how do those benefits translate to everyday life, and how do you take full advantage of them?

In this article, we will answer the most common refinance related questions borrowers ask us, so you can be strategic when considering changes to your mortgage.

What are the different types of mortgage refinance options?

Refinances come in various shapes and sizes. The different types of mortgage refinance loans generally fit into the following three categories:

Rate-and-Term Refinances

In this type of refinance, you are only able to change the interest rate or the loan length. Cash back is not an option. These include:

• Conventional Refinances

• FHA Refinances

• VA Refinances

Cash-Out Refinances

Cash outs can be useful when you have built up equity and want to use it to pay off debt or fund projects such as home improvements. Home equity loans and cash-out refinances will provide you with one lump sum to use for funding, whereas a home equity line of credit (HELOC) will provide you with a line of credit, from which you can withdraw funds as you need them.

Streamline Refinances

Streamlines are only available for government-backed loans like VA loans and FHA loans. They are known for being faster, simpler, and easier to qualify for than their traditional counterparts. These include:

• FHA Streamline Refinances

• VA Interest Rate Reduction Refinance Loans (VA IRRRL)

The type of refinance that is best for you will come down to what makes the most sense for your situation.

What are the benefits of refinancing?

The benefits of refinancing differ depending on your situation and financial goals. Refinancing may enable you to:

• Reduce your interest rate to lower your monthly payment or pay less over the life of your loan.

• Switch from an adjustable rate (ARM) to a fixed rate to avoid future rate increases as the market fluctuates.

• Use your home’s equity to fund home improvement projects, pay off debt, or invest in another property.

• Consolidate debt to take advantage of a lower rate compared to the interest rates of credit cards and student loans.

• Reduce the term of your loan to help pay off your loan faster and pay less overall.

What is the cost to refinance a mortgage?

Since a refinance replaces your current mortgage with a new loan, you will have to pay fees that cover the many services provided throughout the process. Here are some of the most common closing costs you can expect:

• Origination Fees: Include lender services such as underwriting, credit checks, home appraisal, processing, mortgage points, and other administrative tasks

• Title Fees: Cover title-related items like title search, insurance, and settlement

• Prepaid Home Costs: Include insurance premiums, property taxes, and homeowners association (HOA) fees (if applicable)

• Mortgage Insurance: If required, such as with Federal Housing Administration (FHA) loans and conventional mortgages with less than 20 percent equity

• VA Funding Fee: Required with a Veterans Affairs (VA) loan

No-cost refinance

When given the option to pay closing cost fees or not, it can be tempting to think a no-cost refinance is the obvious choice. However, it is important to realize that a no-cost refinance is not necessarily cheaper.

A no-cost refinance wraps fees into the loan instead of charging fees up front. This is possible when you refinance at a higher interest rate or a higher monthly payment. You will also likely pay more interest over the life of the loan. That is not necessarily a negative; there are many reasons to want to avoid the immediate expenses that can come with refinancing. However, your choice will depend on what you are comfortable with paying up front or if you can handle increased monthly payments.

Are appraisals required for refinancing a home?

Yes, you often need an appraisal for a mortgage refinance. An appraisal assesses your home’s current value based on a physical inspection and comparison to similar properties in the area. While it adds time and costs to the refinance process, an appraisal is helpful to both you and your lender. It is necessary to ensure you are not borrowing more money than your home is worth. 

When is an appraisal not required?

There are, of course, exceptions. Appraisals can often be waived for some types of government-backed loans. That is part of what makes FHA Streamline Refinances and VA Streamline Refinances so appealing.

What happens if your refinance appraisal is lower than expected?

If the appraisal comes back lower than you anticipated, your refinance may fall through. Since the property acts as collateral for the refinance, lenders will only approve loan amounts that equate to the appraised value of the home.

A low appraisal can result in your financing being denied entirely, or your lender may end up approving you for a refinance amount that is lower than you expected.

What do home appraisers look for when refinancing?

The final appraisal report will showcase any defects or poor conditions found during the inspection, including photos and possibly graphs. You can expect the appraiser to be looking at the following features during the process:

• Termites: Evidence of any termite-related damage.

• Plumbing: Leaks or damage in all plumbing systems inside and outside, testing the working parts of all faucets, spigots, toilets, and tubs.

• Electrical: Any outlets, panels, light switches, light fixtures, any wiring—check to make sure everything is functioning properly and is up to code.

• Roof: Faulty shingles, cracks, moss growth, gutter issues, and damaged or missing chimney cap.

• Flooring: Any cupping, abnormal sounds, cracking, and other deterioration.

• Windows: Look for any staining on glass or damage to frames, screens, or panes, air leakage, fogging, non-functioning, or missing parts.

• Doors (including the garage): Frame damage, visual damage, and overall functionality.

• Water heater: Unusual sounds, abnormal smells, corrosion, gas leaks, blackened areas near the burner, piping, backdrafting, wiring, ensuring everything is up to code, and the expected lifespan.

• Appliances: Inspect all built-in appliances for proper operation and longevity.

• Walls: Surface damage, dampness, structural damage, and anything harmful in the crawlspace.

• Foundation: Cracks, settling, or damage in the interior or exterior perimeters and foundation supports.

• HVAC (heating, ventilation, and air conditioning): Examine the thermostat, air conditioner, heat pump, furnace, and ducts for damage and proper function.

It is important to keep in mind that no home is perfect. In fact, even new homes can have several things that need to be  fixed.

When is the best time to refinance?

The short answer: It depends. Market conditions can cause an influx of refinances, but there is not one time that makes sense for everyone. The best time for you may be when no one else is talking about it. Here are three strategies that can help you determine if and when it makes sense for you to refinance:

1. When it will save you money in the long run

• • There is often buzz about refinancing when interest rates start dropping. That is because a lower rate, especially coupled with a shorter term, can save you thousands over the life of your loan. Keep in mind that a shorter term may increase your monthly payment.

  • You may also consider refinancing if you have an adjustable-rate mortgage (ARM) and want to avoid the risk of higher rates as your fixed-rate period ends. Locking in a lower fixed rate will save you money and worry about future rate fluctuations.

2. When it will lower your monthly payments

• • If you are experiencing financial strain, it may be helpful to use refinancing as a tool to provide immediate financial relief. A lower rate or longer term can help lower your monthly mortgage payments and add more cushion to your budget.

  • If you have private mortgage insurance (PMI), consider refinancing once you have built up equity equaling 20% of your home’s value. Getting rid of monthly PMI payments will open up funds for you to save or pay down the mortgage principle.

3. When it is beneficial to use your home’s equity

• • Many homeowners appreciate the option to use equity to finance home improvement projects that raise their home value such as a remodeled kitchen or outdoor patio.

  • Did you know refinancing could help you pay off debt? When used carefully, a HELOC or cash-out debt consolidation mortgage can help make your payments more manageable and help you pay less interest over time.

How many percentage points is worth refinancing?

If you are waiting for interest rate percentages to drop before refinancing, the general rule of thumb is to hold off until you are able to lower your current mortgage rate by 1%. Though this may seem like a small drop, even a 1% decrease in your interest rate can save you money in the long run.

How long do you have to wait to refinance?

How soon you are able to refinance after getting your first home loan will depend on the type of mortgage you currently have and the type of refinance you are interested in:

Conventional loans—though you may have the option to refinance immediately, in most cases you will have to wait at least six months before refinancing.

FHA loans—you must own the home and make on-time mortgage payments for at least 12 months before you are eligible for a cash-out refinance.

VA loans—the VA requires you to wait at least 210 days or make six consecutive payments before you can refinance.

There are lenders that will have additional requirements that you must meet in order to qualify for a refinance. Be sure to check with your lender regarding any potential prepayment penalties for paying off your loan too early.

When is it beneficial to use your home’s equity?

For many homeowners, home equity is a great long-term strategy for building wealth, so it is important to make sure you take the time to build it before using it.

Typically, it is recommended that homebuyers follow the five-year rule, which is the minimum amount of time that it takes for you to build enough equity to recoup your initial purchase costs.

There are many ways to utilize your equity once you have built up enough, including:

• Removing private mortgage insurance (PMI) if you did not have a 20% down payment

• Make home improvements and upgrades

• Consolidate other high-interest debts

At the end of the day, these questions rarely have definite answers. Refinancing your mortgage is a personal choice that will depend on a variety of personal factors. That is why it is important to educate yourself and not be afraid to seek guidance from a professional. Be sure to consult your lender to learn what your refinance options are and determine the best path forward for your situation.