Ten Tips for Refinancing Your Mortgage

Refinancing a mortgage can be a smart financial move when done right. It offers the potential for lower interest rates, better loan terms, and even access to home equity. However, it’s essential to approach it with careful planning and awareness of the factors that can impact your long-term financial health. Here are 10 tips to consider before you refinance your mortgage:

1. Evaluate Your Financial Goals

Before you start the refinancing process, think about why you want to refinance. Are you looking to lower your monthly payments, shorten the length of your loan, or access your home’s equity? Knowing the goal will help you choose the right refinancing option.

• Lower interest rate: If mortgage rates have dropped since you took out your loan, refinancing to a lower rate could save you thousands of dollars in interest over time.
• Shorter loan term: If you can afford higher monthly payments, refinancing to a shorter loan term (e.g., from a 30-year mortgage to a 15-year mortgage) could help you pay off your home faster and save on interest.
• Access home equity: A cash-out refinance allows you to borrow against your home’s equity to fund major expenses, such as home renovations or debt consolidation.

2. Check Your Credit Score

Your credit score is important when determining the interest rate you'll qualify for when refinancing. The better your credit score, the more likely you are to secure a lower interest rate. Before applying, review your credit report for any errors and take steps to improve your credit score if necessary. Forbes Advisor recommends a “minimum credit score to refinance: 640 to 720” when looking at a conventional loan. An FHA or other types of loan may not require your score to be as high. However, every situation is different and only your lender can answer questions based on your situation.

3. Consider the Costs of Refinancing

Refinancing isn’t free. It involves closing costs that typically range between 2% and 5% of your loan amount. These costs can include loan origination fees, appraisal and survey fees, title insurance, government fees, homeowners’ insurance, private mortgage insurance, and more. While some lenders offer "no-closing-cost" refinances, the expenses are often rolled into the loan, resulting in a higher overall balance or interest rate.

It’s important to calculate the break-even point, which is how long it will take for your monthly savings to offset the closing costs. If you plan to stay in your home for longer than this period, refinancing might be worthwhile.

4. Compare Lenders and Loan Terms

Don’t settle for the first offer you receive. Shop around with different lenders to compare interest rates, fees, and loan terms. You may find significant differences that could impact the overall cost of your refinance. A community bank is more likely to give perspective and guidance based on their knowledge of the area and understanding of the local community—something that can also be reflected in the rates they offer. Since 1929, Crews Bank & Trust’s residential lenders have been helping customers in Central and Southwest Florida find the right loan for their personal situation.

Be sure to request quotes from at least three different lenders and carefully review each loan estimate. Pay attention to both the interest rate and the Annual Percentage Rate (APR), which includes additional fees and gives you a clearer picture of the loan’s true cost.

5. Understand the Loan Types

There are various loan options when refinancing, and it’s essential to understand the differences:

• Rate-and-term refinance: This is the most common option, allowing you to replace your current mortgage with a new one that has a lower rate or better terms.
• Cash-out refinance: With this type of loan, your old mortgage is replaced with a new loan for more than you currently owe on your home. You can typically borrow up to 80% of your home’s equity. The difference will be in cash, which can be used for home improvements, debt consolidation, or other expenses. (Don’t confuse this with a Home Equity Line of Credit, or HELOC, which is a second mortgage.)
• Streamline refinance: Available for government-backed loans such as FHA or VA loans, this option requires less paperwork and can be faster than a traditional refinance. However, you may not be able to take out cash with this type of loan.

6. Know Your Market

Mortgage rates can fluctuate based on market conditions, so timing your refinance is key to getting the best deal. Keep an eye on market trends, and if possible, consult with a Crews Bank Residential Lender or a financial advisor who can help you determine the best time to lock in a rate.

7. Avoid Extending the Loan Term Unnecessarily

While refinancing can lower your monthly payments, it’s important not to extend your loan term unnecessarily. For example, if you’ve already paid off five years on a 30-year mortgage, refinancing into a new 30-year loan may reduce your monthly payments, but it will extend the total time you’re paying off your home, resulting in more interest paid over the life of the loan.

Instead, consider refinancing into a 25-year loan, which will maintain your original payoff timeline but still potentially lower your rate and monthly payments.

8. Know Your Home’s Equity

Your home’s equity—how much your home is worth compared to how much you owe—can impact your refinancing options. Lenders typically require at least 20% equity in your home to qualify for the best rates. If your home’s value has increased significantly, refinancing can help you leverage that equity, while if it’s decreased, you may face more limitations.

9. Lock in Your Interest Rate

Once you’ve found the best mortgage rate, lock it in. Interest rates can change quickly, and locking in your rate ensures that you’ll secure the deal you’ve been offered, even if rates rise before your loan closes. Make sure you understand how long your rate lock will last and ensure it covers the full time needed to close your refinance.

10. Be Prepared for Paperwork

The refinancing process requires a significant amount of documentation, much like when you first applied for your mortgage. You’ll need to provide proof of income (W-2s and 1099s if you have a side job), pay stubs, Supplemental Security Income (SSI)/pension award letters, a written explanation if you have an employment gap, tax returns, bank statements, and other financial documents. Organizing these ahead of time can help speed up the process.

In Summary

Refinancing your mortgage can provide substantial financial benefits, but it’s essential to be well-informed and strategic about the process. The expert Residential Lenders at Crews Bank can walk you through the various types of refinancing options and help you decide which is right for you. There’s even an online “Should I Refinance” calculator on the Crews Bank website that will help you determine how much you’ll save and if it’s worth moving forward before you invest a lot of time into the process. We are here to help you make a confident decision and potentially save a significant amount of money in the long run.

Important disclosure: The information provided in this material is intended for educational purposes and is not intended to provide specific advice or recommendations for any individual. While other traditional lenders participate in commercial bridge loans, Crews Bank & Trust does not offer bridge loans, nor do they offer soft and hard money loans. All loans are subject to credit approval.