What you should ask your lender before refinancing

When it comes to your preparations before refinancing, you should be asking yourself about your goals and your potential lender questions about the process. Being informed about the changes that a refinance will have on your mortgage is the best thing you can do to avoid unnecessary costs. Knowing what you want out of a refinance is a great place to start because there are several types of ways to refinance. Whether you want to lower your monthly payments, pay off your loan faster, or take equity out of your home to have cash on hand, refinancing can help. Knowing what you need to do to make each of these more favorable for you when picking a lender will save you money. Before applying for a loan estimate with a lender, you should ask them if they will lock the rate until you close the deal and what will happen to your loan once it is closed. All of these are important things to figure out before you put pen to paper with any lender, so let’s look into each of these questions and why you should ask them.
Your goals for refinancing will help you along your way, but the same general issues apply to each of them. You will need to get your finances together by assessing your credit score, your DTI (Debt-to-Income) ratio, and the value of your home. These are the variables that a potential lender will look at when they put together their loan estimate for you. A loan estimate is a lot like the preapproval letter you applied for when you first looked to buy your home. Like the preapproval letter, this will affect your credit score, so you will want to apply for multiple within a short time (about two weeks).
Let’s look at each of the variables a little more. Your credit score is easy enough to figure out, and higher is better, but the best ways to keep it high are to keep your utilization low and your bills paid on time. Next, your DTI is based on the relationship between your debt and your income, specifically the percentage that your debt is of your income. You will want to keep this lower than 40%, but 20% is ideal. Lastly, when you do pick a lender, they will require a home appraisal. They do this to make sure the home is worth more than what you owe and helps to determine your Loan-to-Value ratio. Loan-to-value ratios are the relationship between your mortgage amount and the loan amount, and an LTV of 80% or lower is good. Make sure you are confident that your home will appraise high before starting the refinancing process because this is a large part of the decision-making for the lender. These are all the things you will have to look at in preparation for a refinance. The question you should be asking yourself here is what you can do to make these as favorable to you as possible.
Once you have your finances in order, you should apply for loan estimates from multiple potential lenders. You should do this, despite the effect it may have on your credit score because you can look at a loan estimate to see the loan terms, projected monthly payments, fees, and potential closing costs. Receiving multiple loan estimates means you can find the lender that is the most favorable to your goals. You want to find the most favorable of all of these estimates because that will save you the most money overall.

Let’s imagine your goal is to lower your monthly payments. You will want to pay close attention to your new interest rate from the loan estimate and compare the projected payments to your current mortgage plan. While this is relatively straightforward, you will want to pay attention to the closing costs too. They will either be rolled into the loan raising your monthly payments, or they will need to be paid at closing out of pocket. Questioning closing costs is important when picking a lender; you started this process to save money, and exorbitant fees and high closing costs will hinder that goal. Now, you will want to ask potential lenders if they will lock in your rate until it is time to close. Interest rates for mortgages change daily, and while refinances get completed faster than your original loan, it may take some time. A rate lock is just what it sounds like, it will lock in the interest rate you given at the estimate, and it will protect you against market fluctuations in rates. It may not change much in a few days, but if it goes up, you will be spending more money than if you had it locked at a lower rate. Lastly, you should ask the lender if they will service your loan in-house or sell it. This will not affect the costs you will pay, but it will affect who you pay. While you pay off this loan over 15 to 30 years, it would make it easier to contact your lender if it is the one who gave you the estimate.
Now you know the questions you should be asking yourself and your lender when you begin to look at refinancing.