Should your clients refinance their mortgage?

Refinancing can be a powerful tool for homeowners in the United States. Knowing how to guide clients through a refinance means more than quoting new rates. It requires understanding the borrower’s full financial picture and presenting the best options along with alternatives. It also involves avoiding missteps that can delay or derail the process. 

In this article, Mortgage Professional America will shed light on what mortgage brokers need to know about refinancing. We will cover how it works and discuss some upsides and potential pitfalls. Want to know if refinancing would hurt your clients' credit? Keep reading to find out. 

What does a refinance do?   

Refinancing means getting a new mortgage to repay your old mortgage. The reason most people would refinance their mortgage is for a new principal and a different interest rate. Because the mortgage lender would use the new mortgage to pay off the old mortgage, your clients would be left with one home loan. They’ll also get just one monthly mortgage payment.  

There are a few reasons why your clients might want to refinance their home. They might be using a rate-and-term refinance to secure an interest rate and/or monthly payment that works better for them. Homeowners can also use a cash-out refinance to use their home’s equity. Another reason would be to remove a co-signer from the mortgage, which is a common occurrence in divorces. 

To further understand how refinancing works, watch this video: 

 
If you want to be one of the world’s top mortgage leaders, understanding how refinancing works can be beneficial—especially if you have clients who are interested. 

What are the steps to refinance? 

While it is usually more straightforward than purchasing the property, refinancing includes a similar process: 

1. applying for a refinance 
2. securing an interest rate 
3. underwriting 
4. getting a home appraisal 
5. closing the loan 

Let’s discuss them one by one: 

1. Applying for a refinance 

The first step is to figure out which type of refinance will be best for your clients’ situation. The questions about their financial profile will be like those asked when they first bought the home. These include: 

• income 
• credit score 
• debt 
• assets 

Additional documents might be needed if their spouse is on the loan or if they are self-employed. 

2. Securing an interest rate 

Once your clients get the approval, they might have the option to lock in their interest rate to prevent it from increasing before the loan closes. These rate locks typically last between 15 and 60 days, depending on the mortgage lender. It can also depend on the loan type and location. 

A shorter lock period often means that the mortgage lender takes on less risk. This can help your clients secure a better interest rate. 

3. Underwriting 

After your client submits their refinancing application, the mortgage lender will begin the underwriting process. During this step, the mortgage lender will verify the client’s financial information and review the property details. 

This stage is critical, as it affects which refinancing options the mortgage lender can offer. A home appraisal will then be ordered to determine the home’s value. 

4. Getting a home appraisal 

Just like during the original home purchase, your clients will receive a home value estimate from an appraiser. It’d be helpful to remind them to prepare the property. Small tasks like cleaning and completing minor repairs can make a difference. 

If the appraised value comes in lower than expected, your clients might need to adjust their refinance request. 

5. Closing the loan 

After the appraisal, your clients can choose to move forward with closing the loan. The mortgage lender will send a closing disclosure. This outlines the final loan details. Closing will usually take less time than it did when your clients initially bought the home. 

All in all, remind your clients that refinancing follows many of the same steps as buying a home for the first time. While the process might feel simpler, they still need to go over all these steps. 

Watch this clip for more information on the steps to refinancing: 

 
Is it good to refinance your mortgage? 

Short answer: yes. However, it will depend on your clients’ objectives. Refinancing makes sense when it: 

• lowers your clients’ monthly payment 
• shortens the loan term 
• helps them access equity wisely 

How much does it cost to refinance a mortgage? 

Refinance closing costs can range from 2 percent to 6 percent of the loan amount. These include: 

• mortgage lender fees 
• title services 
• appraisal 
• credit checks 
• prepaid taxes or insurance 

Does refinancing hurt your credit? 

Refinancing can slightly hurt homeowners’ credit scores at first. This happens because banks and mortgage lenders do a hard credit check. Also, opening a new mortgage account can lower the average age of credit. 

However, the impact is often temporary. If your clients make payments on time, their credit scores will recover quickly. You can explain that while refinancing can cause a small drop in credit scores, it won’t cause long-term harm to their finances. 

Different types of refinancing 

The type of refinancing that the borrower will choose ultimately depends on your clients’ needs. Some of the different types of refinancing options include:  

Rate-and-term refinance 

This option changes the loan term, the interest rate, or both. A rate-and-term refinance usually lowers the monthly mortgage payment or reduces interest over time. Unless part of the closing costs is rolled into the new loan, the total amount that your clients owe will stay about the same. 

This type of refinancing is best for clients who want better terms without tapping into home equity. 

Cash-out refinance 

With a cash-out refinance, your clients will borrow more than they owe on the home and take the difference in cash. This can increase their mortgage debt but give them funds for goals like home improvements or debt repayment. 

They can also get a new interest rate and loan term during this process. It’s a good fit for those with enough equity who want to access funds without selling the home. 

Cash-in refinance 

This refinancing option lets your clients pay a lump sum at closing to reduce the loan-to-value (LTV) ratio. It lowers their total mortgage debt and monthly payment. 

It might also qualify them for a lower interest rate. Before suggesting a cash-in refinance, help your clients consider whether that large payment could be used more effectively elsewhere. 

While these three types of refinancing are the most common, there are others such as: 

• no-closing-cost refinance 
• short refinance 
• reverse mortgage 
• streamline refinance 

It’s vital to help your clients weigh the options and choose what best matches their financial goals. 

Benefits of refinancing 

Refinancing offers several possible advantages for homeowners. Here are some of them: 

1. lower interest rate 
2. lower monthly mortgage payment 
3. shorter loan term to pay off the mortgage faster 
4. access to home equity 
5. debt consolidation 

Let’s discuss each one below: 

1. Lower interest rate 

One of the most common reasons to refinance is to get a better interest rate. If rates have dropped since your clients took out their mortgage, refinancing to a lower rate can reduce how much they pay over time. Even a small difference can lead to thousands of dollars in savings across the life of the loan. 

2. Lower monthly mortgage payment 

A lower rate or longer loan term can also lower the borrower’s monthly payment. This frees up money in their budget, making it easier to handle other bills or set aside savings. It’s one of the fastest ways for a homeowner to reduce their financial stress each month. 

3. Shorter loan term to pay off the mortgage faster 

Some borrowers refinance to move from a 30-year mortgage to a 15-year or 20-year term. This means that they’ll pay off the loan sooner. While the monthly payment may go up slightly, the total interest paid is often much less. It also helps your clients build home equity faster. 

4. Access to home equity 

A cash-out refinance allows your clients to borrow more than what they owe and take the difference in cash. This is based on the equity they’ve built in the home. They can use the funds for expenses like: 

• home repairs and renovations 
• education costs 
• other large expenses 

It’s a way to turn equity into available cash without selling the home. 

5. Debt consolidation 

Refinancing can help your clients roll high-interest debt like credit cards or personal loans into a new mortgage. Because mortgage rates are usually lower than credit card rates, this move might reduce the total interest costs and make debt payments easier to manage. Instead of juggling several payments, they’ll just have one. 

Risks of refinancing 

While refinancing can lead to savings or better loan terms, it isn’t always the right choice. Here are some potential downsides that your clients might face when refinancing: 

• it might not save money 
• cashing out too much home equity 
• refinancing too often 
• longer loan term can lead to more interest 
• higher closing costs than expected 

Let's take a closer look at each: 

1. It might not save money 

Refinancing only makes sense if the new mortgage improves your clients’ financial situation. If the new interest rate isn’t at least 1% lower than the current rate, the savings might not be worth the cost. 

This is especially true for newer homeowners who haven’t built up much equity. The smaller the equity, the less flexible the options. Also, the harder it is to break even on closing costs. 

2. Cashing out too much home equity 

A cash-out refinance allows your clients to borrow against the value of their home. But if they take out too much, they might face higher monthly payments. If home values drop, they could owe more than the home is worth. 

This puts them at risk if they need to sell or if their income changes. Mortgage brokers should help clients set limits on how much cash to take. 

3. Refinancing too often 

It’s tempting to refinance again when rates drop. But each refinance comes with closing costs, fees, and paperwork. Doing it too often might cancel out any savings. 

Your clients need to consider how long they plan to stay in the home and how much time it will take to recover those costs. Tell them that refinancing should always be part of a long-term plan, not a short-term reaction. 

4. Longer loan term can lead to more interest 

Some homeowners refinance to lower their payment by starting a new 30-year loan. While the payment goes down, your clients might end up paying more interest over the life of the loan—even if the rate is lower. 

With this, you have to show the total cost of the new loan compared to the remaining cost of the current one. 

5. Higher closing costs than expected 

Your clients might forget that refinancing is not free. For instance, closing costs can be thousands of dollars. If these expenses are added into the loan, your clients will end up paying interest on them. 

If they’re paid upfront, it may take years to recover the money through savings. That’s why you must guide your clients and help them understand how long it will take to break even. 

How interest rates affect refinancing success 

Interest rates don’t tell the full story on their own. To advise clients well, mortgage brokers should also look at these factors: 

• home values 
• equity levels 
• market trends 

When interest rates rise, fewer homeowners are likely to refinance. Still, that doesn’t mean that it’s off the table for everyone. Interest rates don’t exist in a vacuum. That’s why mortgage brokers need to stay updated about these factors that are present in the market. 

Some of your clients might still benefit if they’re switching from an adjustable rate to a fixed rate during a market upswing. In markets with rising home prices, cash-out refinance also becomes more appealing. But in areas where values are flat or declining, LTV limits can block this path. 

The success of a refinance depends on both the timing and the borrower’s position. A strong equity cushion and favorable interest rates make the process smoother. But when either of those factors shifts, mortgage brokers must help clients reset their expectations and adjust their plans. Refinancing isn’t always the right move, and clear guidance makes all the difference. 

Do you have experience with clients who want to refinance their mortgage? Tell us about it in the comments