Answering Common Borrower Questions: “What is a Refinance?”

When refinances regain momentum, there’s no doubt at least a few of your clients will be curious.

Have you found yourself fielding more and more questions about mortgage refinancing in recent months?

No doubt at least a few of your clients will be curious. Taking some time to address their questions can potentially help differentiate you from the competition, grow your business, and overall promote financial education.

So, let’s dive into some of the most common borrower questions surrounding mortgage refinances and their comprehensive answers:

“What is a Refinance?” — Guide Understanding

This is the first question some clients may ask. Some of them may have heard the term thrown around, but most may not understand the nitty-gritty of refinancing.

That’s why it’s important to start with a simple, clear definition. Here’s a sample script you can use:

“Refinancing is replacing your current loan with a new one.

For home loan financing, there are two main types of refinances: rate-and-term and cash-out.

Rate-and-term refinancing pays off and replaces your current home loan with the new loan. This is a popular choice if you just want a lower interest rate, shorter loan term, or both.

Cash-out refinancing pays off your existing mortgage and provides some extra cash. You can use this surplus to pay off other debts, fund renovations, or for any expense you choose. It might also come with a lower interest rate and/or shorter loan term or it may result in a higher loan balance and a longer loan term.”

At this point, be sure to check for understanding and address any follow-up questions head-on.

“What are the Pros and Cons of a Refinance?" — Add Context

Once everyone is on the same page, consider covering some of the potentially relevant pros and cons.

A handout featuring the bullet points below might be a good jumping-off point (you can even highlight any that are relevant to their specific situation):

Understanding the Potential Pros of a Refinance:

• Potential savings, via lower interest rate.
• Potential to consolidate other consumer debt at a lower rate.
• Potentially shorter loan term, meaning faster repayment.
• Potential to trade an adjustable-rate mortgage loan for a fixed-rate mortgage loan.
• Potentially removing private mortgage insurance (PMI).
• Potential for cash-out.

Understanding the Potential Cons of a Refinance:

• Potentially expensive and out-of-pocket costs and fees required to refinance, similar to original closing costs.
• Potential to spend longer paying down your mortgage loan. 
• Potential high loan balance if cash is being taken out.
• Potential reduction in the amount of equity remaining in your home if cash is being taken out.
• Potential for prepayment penalties, depending on the lender.
• Potential for increased costs over the life of the loan, depending on the new loan (lender, loan term, interest rate, cash-out versus rate-and-term, etc.).

“How Much Does a Refinance Cost? — Set Expectations

Of course, cost is an important consideration for most clients.

The good news is that, when it comes to refinancing, they’ll have real-world experience to draw upon. Remind them of the closing costs they previously paid and let them know that this process will look similar.

Bringing up the following costs might jog their memory:

• Government recording costs
• Appraisal fees
• Credit report fees
• Lender origination fees
• Title services
• Tax service fees
• Survey fees
• Attorney fees
• Processing fees
• Underwriting fees

You can share that the typical cost falls usually between 2% and 6% of the loan principal but running their real-world numbers together will be that much more valuable.

Don’t forget to clarify that final costs will depend on their location, total loan amount, and any relevant low- or zero-closing cost programs! Important note: If there’s a chance your clients qualify for programs like these, also ensure they understand that the costs likely don’t just disappear and instead may be rolled into the total loan amount.

“Should I Refinance My Home?”— Share Your Knowledge

And here it is, the million-dollar question!

At this phase, you’ll just want to be honest. State the fact that there is no universal right answer to this question and that financial decisions of this magnitude should never be taken lightly.

Don’t be afraid to share your wisdom, though. If you firmly believe that a refinance might be right, let the client know! The same goes for situations where a refinance just might not make sense.

Finish up by urging clients to do some research, providing some of your favorite educational resources, and finding answers to any of their lingering questions. Then, they’re in the driver's seat! Sit back and wait to see what they decide.

Final Thoughts: How to Best Explain the Mortgage Refinance

Mortgage loan refinances may be regaining momentum, and they could be a powerful path to financial benefit for some of your clients. These borrowers unfortunately may not have learned the ins and outs in school, though, and they definitely may not have the inside, industry knowledge that you do.

By taking some time to address their questions, you can demonstrate your value as a professional, grow their level of understanding, and overall champion financial education well after closing day. Talk about a job well done.

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