Thinking about refinancing can feel overwhelming at first, but it is one of the smartest financial moves you can make. Whether you’re looking to lower your monthly payment, pay off your home faster, or take out equity for home improvement, refinancing can be extremely beneficial for homeowners.
Before you refinance, you should know the basics and what to expect. So, here are 5 main steps of the refinancing journey!
Step 1.) Define The Reason for Refinancing
Have a clear understanding of your motive for refinancing. Common goals include:
- Lowering your monthly mortgage payment
- Paying off your mortgage faster by switching to a shorter-term loan
- Accessing home equity by using a cash-out refinance. This can be helpful for funding home improvement projects or paying for other expenses
Knowing your “why” helps you choose the option that best fits your needs.
Step 2.) Gather Your Financial Information
Before committing to a refinance, note some key financial factors.
- What’s your mortgage’s interest rate? What is its’ term length? And is it fixed or adjustable?
- What’s Your Credit Score? Higher credit scores often can get you better rates when you refinance your mortgage. To check your credit score, note that many banking apps have free tools where you can check for free, with no penalty.
- Double check if your loan comes with any prepayment penalties (penalties incurred if a loan is paid off earlier than projected.)
Step 3.) Evaluate the Market & Calculate Your Savings
The first thing to ask yourself is: Are the current interest rates averaging lower, higher, or similar to your interest rate? Check out the average rates for 30-year and 15-year fixed mortgages updated weekly here: https://www.freddiemac.com/pmms.
If the current rates are lower than the one you have, the next step is to calculate the break-even point. The break-even point is the time it will take for your monthly savings to cover the closing costs and fees of refinancing. If the break-even point is within a reasonable timeframe for you (for example, less than 3 years), then a smaller rate drop might be worthwhile, especially if the loan amount is large. Calculating the break-even point will show you when your refinancing becomes profitable to you.
Break Even Point Example:
Home Price $300,000 Down Payment (20%) $60,000 Loan Amount $240,000 Current Mortgage Rate 6% New Mortgage Rate 5% Term 30 Years Estimated Closing Costs $4,000
Old monthly payment at 6%: $1,438.92
New monthly payment at 5%: $1,288.37
Monthly savings: $150.55
Break Even Point Calculation
Closing Costs ($4,000) ÷ Monthly Savings ($150.66) =
Number of Months to Recoup Closing Costs (26.6 months)What this means: With a 6% to 5% refinance, it will take about 26.6 months (about 2 years and 3 months) to recover the $4,000 in closing costs through monthly savings. Once that time is over, the refinance starts saving you money.
- FREE Interest Rate Calculator: Use an online interest rate calculator to see if the current rates would make a significant dent in your mortgage payments. *Use the interest rate calculator on our website here! (And don’t forget to consider adjustable rate mortgages, as well as your ability to change your loan term – 15 year vs. 30 year, etc.)
- Hate Math? If you don’t want to do the math yourself, give a trusted Mortgage Loan Originator a call. They would be more than happy to assist you with this.
The rates shown in the example are for illustrative purposes only and do not reflect Core Bank’s current offerings.
Step 4.) Compare Rates & Options
It’s time to dive in and start making some calls!
- Shop Around: Once you know what rate you’re looking for, shop around for competitive offers. We recommend getting a quote from 3-5 different lenders before making a decision. NOTE: Some lenders may waive closing costs or origination fees, provide discounts for existing customers, or offer cash bonuses.
- Our Shameless Plug: Here at Core Bank, we always aim to get our clients the best deal possible. We offer flexible solutions tailored to your needs. Don’t get boxed in by the bigger banks! All of our Mortgage Loan Originators would be glad to help you find what’s best for you in your refinancing journey.
Step 5.) Apply!
The finish line is in sight! Here are some tips to ensure the refinancing process goes smoothly.
- Don’t Forget Your Documentation: Applying for a refinance usually means you need to verify your income (usually you will be asked to provide payment stubs, tax returns, bank statements, etc). You will also be asked to provide your homeowners insurance policy and current mortgage statement. Not to mention forms of identification from you, the homeowner.
- Avoid Major Financial Changes
Hold off on big purchases or opening new credit accounts during the refinancing process. These changes can affect your debt-to-income ratio and can delay approval.
In Summary
Refinancing doesn’t have to be intimidating. With the right preparation and a clear understanding of your options, it can be one of the smartest financial moves you make. By gathering your documents, checking your credit, and comparing rates, you’ll feel confident throughout the process. Remember, refinancing is about creating a plan that works for you—so take it step by step, and you’ll be on your way to saving money and reaching your financial goals.
