3 Things I Did Before Refinancing My Mortgage

by Maurie Backman | Published on Sept. 6, 2021

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Refinancing was a wise move for me, but I made sure to take these steps first.

Last summer, when mortgage rates were sitting at historic lows, I made the decision to refinance my mortgage.

Often, refinancing will help you lower your monthly mortgage payments. In my case, I was looking to swap a 30-year loan for a 15-year loan, which meant my monthly payments would rise slightly, but I'd spend less on interest throughout my repayment period.

I knew that based on what refinance rates looked like at the time, I'd be able to lower my loan's interest rate by over 1%. And as a rule of thumb, that's generally what you want to aim for -- a rate reduction of 1% or more. But before I moved forward with a refinance, I took these important steps.

1. Checked my credit score

Mortgage lenders tend to reward borrowers with strong credit in the form of lower interest rates. As such, I wanted to make sure my credit was in good shape before applying for a new mortgage.

Usually, once your credit score reaches the mid- to upper-700s, you're eligible for the best rates a lender is willing to offer up. I knew going into my refinance that my credit was strong because I've always paid my bills on time and have never carried a credit card balance.

In fact, the only debt I had at the time of my refinance was my existing mortgage. But still, I wanted to give my credit score a check-up just to make sure. Thankfully, my score was where I expected it to be, and I qualified for a low refinance rate because of it.

2. Shopped around for offers

I knew going into my refinance that the offered rates could vary from lender to lender, and I wanted to make sure I'd get the best deal. So I made a point to reach out to different refinance lenders rather than go with the first attractive offer presented to me.

In the course of my rate shopping, I contacted my existing lender first. I figured that since we had a borrowing relationship, it would be a good place to start. But actually, another lender wound up coming in with a more competitive interest rate and lower closing costs, which are the fees you pay to finalize a home loan. So that lender made the most sense to work with.

3. Made sure I planned to stay in my home for at least a couple more years

I've contemplated moving many times over, either to another town within my state or even out of state altogether. But before I refinanced my mortgage, I needed to make sure I was okay with the idea of staying in my home for at least two years.

The reason? The closing costs I just mentioned. Mine were not expensive compared to what some lenders might've charged me, but I had to make sure that paying them was worth it.

Now normally, when you're refinancing to lower your monthly payments, you can calculate your break-even point by taking the amount of your closing costs and dividing it by your monthly savings.

For example, I paid about $3,000 in closing costs. Say you're presented with similar fees, and in return, you get to lower your monthly mortgage payments by $200. That means your break-even point is 15 months. So as long as you plan to stay in your home beyond that point, refinancing makes sense.

In my case, that break-even point didn't apply because I wasn't lowering my monthly payments, but rather, increasing them a little bit. But based on the interest-related savings I would reap, I decided that staying in my home for at least two years would make refinancing a smart move. And since I didn't want to move in the midst of a pandemic or even at the tail end of one, I then determined that staying for two years was likely.

Refinancing a mortgage has its benefits, and right now, rates are such that it could be a smart move. Just make sure to take steps similar to the ones I took before moving forward.

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