With mortgage rates no longer at or near record lows, the refinance question has become a lot more complex.
It used to be a no-brainer to refinance if you hadn’t in a while, with 30-year fixed rates in the 2-3% range for many years thanks to the Fed and their mortgage-backed securities (MBS) buying spree.
But those days have come and gone, and today the only homeowners looking to refinance probably got their mortgage when rates were closer to 8%.
Of course, there are myriad reasons to refinance and you’ve likely pondered one at some point if you’re already a homeowner.
You probably have a lot of questions too, especially if it’s your first time refinancing a home loan.
Let’s clear up some of the confusion by tackling some of the most common refinance questions out there.
1. When is a good time to refinance?
As noted, mortgage rates are no longer near their record lows, sadly. In fact, they’ve since more than doubled as inflation finally forced the Fed’s hand.
This has made refinancing attractive to only a select few at the moment. In the not-too-distant past, it used to be anyone with a stale interest rate. No longer…
But there are other reasons to refinance too, such as to tap home equity to furnish improvements or to pay down other debt or other expenses.
You just have to be mindful of losing your low rate in the process, assuming you currently have a low rate.
If your rate ain’t great, there are some refinance rules of thumb out there to consider, but a one-size-fits-all solution doesn’t exist.
However, it’s pretty easy to know when to refinance if your current mortgage rate is significantly higher than today’s market rates.
For example, if interest rates are 1% lower, or even 0.75%, it’s typically a simple decision to make.
Just take the time to do the math first, and think through how long you plan to keep the property/new loan. And what your loan payoff goals are.
Also be mindful of paying discount points because they can take years to break-even on.
2. Do I have to wait to refinance?
Another common refinance question pertains to waiting periods and refinance frequency. That is, how long until you can refinance, and how many times can you do one?
While there are certain waiting periods depending on the type of home loan in question, you can generally refinance right away and as many times as you like, within reason.
However, a lender may lose their commission if you refinance too quickly, generally if less than six months have passed since you closed your previous loan.
If there is a certain waiting period, you might be able to refinance into a different loan type, such as from a FHA loan to a conventional loan to forgo the requirement.
This way you won’t miss out if you feel mortgage rates are going to rise if you don’t act fast.
Just be careful not to become a serial refinancer, as it can cost money to refinance your mortgage each time, and potentially set you back from paying the thing off.
As always, moderation is key here.
3. Are refinance rates more expensive?
Generally, refinance rates are higher than home purchase loan rates, though perhaps only marginally, and sometimes not at all. It depends on the lender and the current rate environment.
Plus, you might find that when refinancing, the new bank or lender you use turns out to be cheaper than the one you used to finance your home in the first place.
While interest rates can be exactly the same for a rate and term refinance and a home purchase, be sure to pay attention to any difference in points and/or closing costs.
And note that cash out refinances will often be more expensive, possibly .25% to .375% higher depending on all the loan attributes.
This is because a larger loan amount is inherently riskier, so defaults are more likely and rates are priced accordingly.
4. Should I take cash out of my home?
When refinancing, you’ll be given the option to take cash out of your home, assuming you’ve got sufficient home equity to do so.
Often, this is a question you’ll be asked when completing a preliminary lead form. It’s entirely optional and really driven by need.
Do you need cash? Do you have other expenses or high-interest rate debt that could be paid off via a cheaper mortgage?
Are rates low, medium, high right now?
Take the time to determine if a cash out refinance makes sense versus simply obtaining a new rate and term.
Remember, the interest rate will likely be higher if you opt for cash out, so reserve it for a specific need.
And note that it’ll slow down any loan payoff goal you’ve got as you’ll wind up with a larger loan amount.
5. Should I go no-cost or pay fees?
Another decision you’ll need to make when refinancing is whether to pay closing costs out-of-pocket or opt for a lender credit.
Most lenders will offer a no cost refinance option to make it look more appealing – who doesn’t like a lower rate they don’t have to pay for?
Ultimately, you do still pay for it, via a slightly higher interest rate relative to the refinance that costs money.
Of course, it can be worth it not to pay points or fees in exchange for a marginally higher monthly payment.
Those points paid upfront can takes years to pay off via the lower monthly payment. And if you don’t keep your mortgage long enough, well, it could be a waste of money.
In addition, you may not want to put any more money into your house, especially if you plan to move or refinance again in the near future.
As always, do the math to determine which approach makes more sense based on your wants/needs. Certainly put in the time to do a side-by-side analysis.
6. What loan term should I get on my refinance?
If you have a 30-year fixed mortgage right now, you’ll probably just get another 30-year fixed. It’s the most common and popular loan program out there.
But the 15-year fixed is the second most popular loan program out there, and an even more common choice for existing homeowners who refinance.
Why? Because it means you don’t reset the clock when refinancing, that is, extend the loan term beyond its original duration.
Assuming you actually want to pay off your loan sometime this century, it can make sense to refinance into a shorter-term loan.
Aside from staying on track to pay off your loan, 15-year fixed mortgage rates are cheaper than their 30-year fixed counterparts.
It’s also possible to keep your existing loan term when refinancing. So if you’re four years into the loan, getting a 26-year loan if it was originally a 30-year fixed.
7. Can I really skip a payment when refinancing?
A common pitch used by loan officers, mortgage brokers and lenders is that you can skip a mortgage payment when refinancing.
Obviously, the thought of not having to make a monthly payment, especially on a large home loan, is enticing.
So is it true? And if so, how does it work? It is indeed true, and it works by closing your loan at a certain time of the month.
This way you don’t need to pay your old lender, and your new loan’s first payment won’t be due for a month or longer.
This can provide you with some mortgage payment relief, but it’s not really skipped – it’s simply delayed. Still, this can be beneficial from a short-term cash flow perspective.
Just note that the downside is you’re slowing down your loan payoff slightly by delaying mortgage payments.
8. Does my refinance require another appraisal?
I recently talked about how refinances don’t always require an appraisal. And this is becoming more and more common as technology improves.
Simply put, companies like Fannie Mae and Freddie Mac are leveraging data to determine if and when an appraisal is actually necessary.
If their automated underwriting system determines that a manual appraisal isn’t necessary, they may issue an appraisal waiver.
This can save you money (hundreds of dollars) and shorten the time it takes to get a mortgage.
But it only works on certain types of refinances, namely rate and term refis.
The thinking is a borrower obtaining a lower rate and corresponding monthly payment is less risky, especially if they have property value data in their database that says the value inputted is on point.
Conversely, an appraisal will likely be required for a cash out refinance.
9. Can I refinance with poor credit?
Yes, you probably can, depending on your definition of poor. Is it advisable? That’s another question.
Ultimately, you’re going to want a credit score of at least 620 in most cases to entertain a mortgage refinance, though scores can be lower for FHA loans and VA loans depending on the lender.
However, a poor credit score can increase your mortgage rate, making the refinance less worthwhile (you’re doing it to save money remember!).
So your goal should be to improve your credit scores before applying for a refinance. Sure, you can look into if you’ve got a bad or marginal score, but you may find that the interest rate offered isn’t too hot.
A better plan is to boost your scores, then shop for that refinance, which should result in much bigger savings.
Simply put, it might be best to refinance once instead of twice, after your credit scores are back in good shape.
10. Can a refinance lower your credit scores?
Now let’s look at the other side of coin – the idea that a refinance can hurt your credit score.
While any request for new credit (a refinance is technically a new credit line) can push your scores lower, it typically won’t do much damage.
Sure, there are the mortgage inquiries and the existence of a new credit account on your credit report, and the loss of the old loan. But often you won’t see your scores fall more than a handful of points.
And even then, if you got your refinance done, who cares if your scores are depressed by five points or so for a month or two? Hold off on other loan applications if need be until things clears up.
The takeaway is the savings from the refinance should easily eclipse any temporary credit score ding, which may or may not even take place.
11. Can I refinance without equity?
Yes. There are streamline refinance programs available for all the major loan types that allow you to complete a rate and term refinance, even if you have zero equity in your home.
This includes FHA loans, VA loans, USDA loans, and conventional loans backed by Fannie Mae and Freddie Mac.
For conforming loans backed by Fannie/Freddie, it used to be known as the Home Affordable Refinance Program (HARP).
Today, it’s called a HIRO refinance, which is short for high-LTV refinance option, though it is temporarily paused due to a lack of need.
There are rules that apply, such as clean mortgage payment history, loan seasoning, and minimum LTVs, but it should be easier than a traditional refinance and provide payment relief.
And most banks, brokers, and lenders out there offer these programs.
12. Why do I need to pay for title insurance again?
There are two types of title insurance, one for the lender and one for the borrower. When you refinance your home loan, it’s obligatory to purchase a new lender’s title insurance policy.
This protects the lender, even if you use the same exact lender again, from title defects and issues related to chain of title (lawsuits, claims, etc.).
The good news is you should be able to get your hands on the “reissue rate,” which is supposed to be quite a bit cheaper than a brand-new policy.
The bad news is this is one of the many unavoidable costs associated with a refinance, though as noted earlier, it can possibly be absorbed via a lender credit.
13. Should I lock or float my rate?
This is the million-dollar question all borrowers will ask themselves, and perhaps their broker or loan officer.
Ultimately, no one has a crystal ball, nor can they predict the future. Like most things financial, mortgage interest rates can change daily, and even throughout the day.
They can go up, down, or simply remain unchanged. During volatile times, rates can swing wildly in either direction, resulting in a material change to your mortgage payment.
The takeaway is to lock your rate when you’re happy, and to float it if you believe you can do better, but can live with rates moving higher.
Those with a longer timeline until closing have a greater chance of securing a lower rate via floating, just based on the sheer amount of time for rates to drift lower.
Conversely, if closing soon you won’t have as many opportunities to see an interest rate improvement, and might as well lock.
14. How long does it take to refinance a mortgage?
Similar to a home purchase loan, it can take anywhere from 30 to 60 days from start to finish to complete your refinance.
There are many refinance steps, just like when you took out a loan to buy the property.
However, refinance loans typically do close slightly faster, assuming normal market conditions.
For example, it might take three weeks as opposed to an entire month. But if lenders are slammed, it could take up to two months to get to the finish line.
Ultimately, you should expect a similar timeline to that of your home purchase loan, but if it closes sooner than great!
Remember, your broker or lender may also time it to close right around month’s end to help you skip a payment, so there may not be much of a rush.
15. Can you refinance with the same lender?
Yes, you can refinance with the same lender that closed your original loan. Or the same mortgage broker if you used a broker.
And there’s a good chance you’ll hear from them before you ever decide to reach out. They know the rules and if rates drop, they’ll likely be thumbing through the old rolodex.
There’s no rule that says you can’t use the same lender, though there is sometimes a commission recapture if the loan is refinanced too quickly.
This is typically a 180-day rule where the loan officer or broker would lose their original commission. But after that it’s generally fair game. And it doesn’t really affect you.
Just note that there’s a difference between a lender and a loan servicer, the latter of which collects payments after the loan funds.
Most mortgages these days are sold off to different companies, so it might not actually be the same lender after all.
16. Should you refinance through the same lender?
Related to the question above, the answer depends on how competitive the lender is. And how their service was the first time around.
If you liked them before, certainly reach out for a refinance quote. But don’t stop there. Also get quotes from other banks, lenders, and even take the time to compare mortgage brokers.
Studies prove multiple quotes lead to real savings. So while you might feel some loyalty to the original lender, still shop around.
Then you can tell the original company you have a lower rate and see if they can match or beat it.
Remember, the mortgage rate you secure will affect your checkbook monthly, potentially for a long time.
Don’t just mail it in because you know somebody and it’s convenient to do so.
17. Do I lose home equity after refinancing?
It depends on the type of refinance. If you simply change the rate and/or term of your loan, your equity position remains unchanged.
For example, if you owe $300,000 on a home valued at $500,000, a rate and term refinance wouldn’t change anything in terms of equity. You’d still owe $300,000 and have $200,000 in equity.
But if you elected to take cash out, say $100,000, you’d have a mortgage balance of $400,000 post-refinance.
This would mean that you’d have just $100,000 in home equity remaining. Of course, it’s not necessarily lost.
It’s just being utilized for other purposes, whether it’s a home improvement project, paying for college, paying off other bills, etc.
And each month you hold your loan, a portion of that lost equity is being paid back via your normal mortgage payment.
18. What’s in it for the lender?
Sometimes homeowners are confused as to how the mortgage broker or lender that closed their loan in the past would benefit by offering them an even lower interest rate.
For example, if your home purchase loan was set at 4% with Bank A, then they contacted you with an offer of an even better 3% mortgage rate, you might be left scratching your head.
The answer is that your loan was likely sold off shortly after it funded, and they made their profit when it did.
After six months elapse, they can offer you a subsequent refinance and make a commission again, with the investor of the loan the one perhaps losing out.
It’s also pretty common to refinance with a different bank or lender the second time around. So even if the loan was held in portfolio (as opposed to being sold), the new lender could profit from the refinance.
At the end of the day, it shouldn’t really matter what they’re making on your loan as long as you’re saving money, and you’ve taken the time to shop around for the best rate and closing costs.
So that’s that – hopefully a mortgage refinance doesn’t feel as daunting anymore. Sure, they can be stressful and time consuming, but the potential return on investment is typically unmatched.
Read more: 25 Mortgage Questions You Asked, Answered