If you purchased your home around 2019 to 2023 with a mortgage rate of around 5%, you’re likely holding your breath waiting for interest rates to drop. However, they’ve actually gone up to over 7% making refinancing very unrealistic for many homeowners.

Interest rates have eased slightly so in the hopes that they’re continuing to drop, it’s important to be refinance ready. Refinancing is not an automatic thing as it requires preparation, timing, and understanding of your financial position.

Now may not be the right time to refinance, but it’s always the right time to plan and prepare a refinance readiness checklist. You want to avoid any common mistakes, be ready to lock in terms when they arrive, and protect any long-term financial goals.

“Refinancing isn’t just about chasing a lower rate. It’s about matching your mortgage to your life goals and financial plan. Prepared homeowners reap the biggest benefits.” – Matthew Magotta, Park City Real Estatev

Understand your current mortgage

before you can evaluate any type of refinance you’ll need to fully understand your existing loan. You’ll want to collect the most recent mortgage statement and pay attention to:

• Current interest rate
• fixed or adjustable loan type
• remaining principal balance
• loan terms
• monthly principal and interest payment
• prepayment penalties

This is a baseline for deciding if refinancing is right for you. If your current cost is 5% or higher and newer rates drop significantly below that, you might be in a strong refinancing position. Typically if you can’t save 1% or more, it’s not worth it.

Set a target rate

Just because a rate has dropped doesn’t mean it’s necessarily it’s time for a refinance. If the rate drops at least 1% lower than your current rate after accounting for closing costs and you plan to stay in the home less than five years, the savings might be worth it.

Check your credit score

Now is a great time to check your credit score and report. You can get a free credit report once per year by the three major credit reporting agencies, Experian, TransUnion, and Equifax. You’ll want to pull the latest credit reports from all three bureaus and confirm your credit score. Look for any errors such as incorrect amounts or late payments, correct them, and reduce any credit utilization. Try and keep your debt under 30%, not including your house.

Having a higher credit score will typically unlock lower rates and better terms overall. If your score has improved since you bought the home, that’s also an advantage. If your credit score has decreased, now is the time to fix it.

Reduce debt and improve your debt-to-income ratio

Lenders take a look at your debt-to-income also called DTI ratio, which includes your monthly debt payments divided by your monthly income. Lower debt-to-income ratios make refinancing easier and help you qualify for better terms.

Here are some things you can be doing monthly to improve your credit score and lower your DTI:

• pay down any high interest credit cards
• avoid new car loans or large personal loans
• refinance or consolidate smaller debts if it’s beneficial

If your DTI is above 43% of your income, it’s time to focus on improvement. Many lenders will require lower ratios for better financing.

Break Even Point

You’ll want to estimate your break-even point by using this formula:

Break-Even Point = Total Refinance Costs ÷ Monthly Savings

Example: If closing costs are $4,000 and monthly savings are $200:

→ Break-Even = 20 months

If you plan on living in your home longer than 20 months, refinancing can add value. If not, it’s probably not worth it at this point.

Refinance options

There’s a variety of ways to refinance. These options include:

Rate and term refinance – this is for a lower interest rate or to adjust the terms of the loan. If you’re moving to a 10 or 15 year mortgage and you want to pay off your mortgage faster. You can typically skip a mortgage payment but your monthly payment will increase.

Cash out refinance – this is where you can borrow more you than owe and take the difference in cash. If you have equity in your home, you can use some of that equity to pay off credit card debt, home improvements, or any other major expenses.

Streamline or no appraisal options – this is available in select loan programs. It’s a quicker way to do things and it reduces documentation and appraisal costs but there are restrictions and limitations. However this might be a good option for some homeowners.

You will want to find the best option for your personal goals whether it’s a lower payment, better terms, or access to some of your equity in cash.

Get prequalified

Pre-qualification or pre-approval is important so try to get pre-qualified with more than one lender as this will give you clear idea of your eligibility, closing costs and all the necessary documents you’ll need.  This prevents any surprises later and they can offer you a good checklist to be working on.

Monitor interest rates

You can monitor entries without obsessing over that. Watching rates every day can cause a little bit of anxiety so the best way to do that is to set alerts with a mortgage rate tracker, use your target rate as a trigger point, and when those rates your trigger, run your numbers again.

Get your documents in a row

Here are some of the documents you will probably need:

• tax returns for the last two years
• W-2s or 1099s
• Pay stubs for the last two months
• bank statements
• mortgage statement
• homeowner insurance declaration page

Connect with a loan officer or financial advisor

even if you’re not ready for a refinance right now talking to a professional can help you prepare loan documents, forecast rate movements, compare loan programs, and help you plan for a seamless refinance in the future. These experts can help you choose the right strategy for your timeline, targets, and goals.