I’ve shared a lot about our first home purchase from the starter home purchase price to the easy ways we were paying it off faster to drop PMI.

Now I’m sharing the next phase in our home ownership journey: our mortgage refinance.

Our Home Refinance Trigger

When mortgage rates dropped to low levels in the middle of the pandemic during 2020 we decided it was finally time to start a refinance of our loan.

We bought our home in 2016 and had been paying $99 a month in mortgage insurance premiums every single month since then. We had not found an opportunity that made since to refinance previously because we had a decent rate at 3.625%. The few times I looked into refinancing the interest rate was not low enough to give us any financial benefit.

Once interest rates started dipping below 3% I knew it would be a good time to refinance for us because we might finally be able to get a deal good enough to break even from closing costs within a reasonable time frame.

While the pandemic of 2020 is tragic in many ways it was a great financial opportunity as far as interest rates on mortgages went.

Shopping Mortgage Refinance Offers

Once I wanted to refinance I knew it was time to shop around and find the best mortgage refinance offer.

To compare the offers I made sure to look at several things:

• the new interest rate compared to my rate
• the new payment compared to my payment
• the total amount of closing costs
• when I would break even based on closing costs

Those were the most important factors. It makes no sense to refinance your mortgage if you aren’t getting a better deal that will start saving you money within a reasonable time frame, especially if the home is not your “forever” home.

I decided that I wanted the interest rate to be 2.75% and less than $2,500 in closing costs, and preferably a 15 year loan. I set out to find just what I wanted!

I began with Rocket Mortgage / Quicken Loans because they were constantly advertising to me and I’d previously reached out and their loan officer straight up told me it wouldn’t make sense for us (I valued the honesty instead of trying to make a sale). However this time I got a different person and it was not a pleasant experience. They were the first I checked with but the rate was higher than I wanted (I wasn’t refinancing who was pushy and would not get the rate below 2.99% with over $4,000 in closing costs. When I explained their costs were higher than I wanted the sales person got pushy and tried to explain interest rates to me like I didn’t understand how much money I could be saving. I already knew I wasn’t going with them based on having the worst quote but that experience was rude but unfortunately likely works on people who aren’t as savvy who then end up paying more.

Because that first check on my credit had opened my mortgage shopping period I then checked with every single bank I could in my city as well as local credit unions. I figured if the larger national mortgage companies weren’t providing great service then I should turn to banks that were known for doing a better job.

I got about 10 different quotes and some got close to what I wanted but not quite. I went ahead and checked with the bank I already used for business checking because it’s a regional bank who’s been great to deal with so far. They ended up giving me the best closing cost quote: just $2,000. They also agreed to lock me in at 2.75% and wouldn’t go forward with the paperwork unless that was a sure deal. At the time I contacted them rates were bouncing back up to 3% but they assured me that they were there to get me what I wanted … and they did!

Our Mortgage Refinance Experience

Because of the low closing costs and great rate I went with Iberia Bank for my mortgage refinance. I figured they would likely sell my loan to a larger servicer but the deal for my mortgage was just too good to pass up.

Because I banked with Iberia already they allowed me to waive the appraisal of our home for the refinance. I’m not sure if that is 100% the reason or if it was also because of the pandemic or that they could look at real estate websites and conservatively estimate our house at an amount that would have us past 80% loan to value ratio.

We didn’t have to do an appraisal but we did have to still provide a lot of paperwork.

The video above shows the things you have to provide in order to refinance out of your FHA loan to a conventional mortgage during a refinance. Here are the things we had to provide during our refinance:

• two years of tax returns
• two years of W-2s
• last two paycheck stubs
• current mortgage statement
• current insurance information
• credit checks
• credit check explanation (for mortgage shopping)
• approval for no appraisal (you might have to do an appraisal)
• explanations for anything confusing (my work had to provide one)
• proof of identity

Even though you already “own” the home you are creating a new mortgage so it’s very much like the first time you buy a home. You have to provide a lot of paperwork and “prove” yourself in order to qualify. They want to know that you have the income and stability to pay this new loan.

Our refinance experience was interesting because they were so bogged down and busy during this period because many, many people were refinancing. We actually would go long stretches without hearing anything back from the bank. At points it felt like they had forgotten us but I knew they were overwhelmed and were working on it.

In the end the underwriting and everything went smoothly and we closed on our refinance in April 2020.

Our New Mortgage Details

Our new refinanced mortgage is pretty great in my opinion and it’s set up to let us pay our home off even faster than we had originally planned.

Here are the details for our new mortgage loan:

• New loan amount: $142,000
• Interest rate: 2.75%
• Loan term: 15 years
• Monthly principal & interest: $963.64
• Monthly payment: $1,292.96
• NO PMI

This fit all of the requirements I wanted when I set out to refinance our mortgage.

The break even for us was just under two years and we knew we planned to stay at least that long and potentially keep this house forever as a rental. With that in mind it was very exciting to be saving so much money in the long run and paying off this home much faster.

As you can see from the most recent mortgage payoff video in July 2020 we are already paying off the mortgage at a much faster rate.

Our new mortgage payment is $93 per month more than we were paying with our original loan each month yet we are more than doubling the amount we are paying toward our principal balance each month.

With this new refinanced mortgage loan we are starting off with our first payment sending $638.22 to reducing the principal of the loan and that number will only increase over time. In just 9 months we will be sending over $650 per month to reduce the loan balance.

This mortgage refinance has drastically increase how fast we will pay off this loan and reduced the amount of interest we will pay. Even if this is not our home forever I’m thrilled to see my money being used for equity instead of PMI and interest!

Your credit score is incredibly important for many reasons from buying a home to paying less on debt you do owe. People often use good credit to leverage their money and achieve more than those who have bad credit.

If you are wanting to improve your credit and reach a good credit score so. you can have more opportunities then you first need to know what makes up your credit score.

How To Get Your Credit Score

You can get your free credit score from Credit Karma here via my affiliate link. You can also get free scores from major credit card providers.

One thing to note is that Credit Karma and other free services offer your Vantage Score, not your FICO score. Most lenders use the FICO score as your credit score which means your free score you are tracking may be off. Based on what I’ve seen from hundreds of people it can be off anywhere from 2 points to 100 points depending on your credit profile.

If you want your accurate credit score that lenders will see then you have to pay for it. You can purchase your score from the consumer facing side of the FICO brand at My FICO. This is the only option to see your FICO score unless you are working with a lender who will let you see it in their portal.

You can get your FICO score at My FICO with plans starting at $19 a month, via this affiliate link and cancel when you don’t need it any longer.

What Makes Up Your Credit Score

The information in this post and video about what makes up your credit score is from Credit Karma. I chose to use Credit Karma as an example because it lays out the information well and makes it easy to understand. It’s also a FREE platform that has helped hundreds of thousands of people improve their credit.

According to their platform (and from what I’ve seen in improving my own credit score), your credit score is made up of these 6 factors:

1. Payment history
2. Credit card use (credit utilization)
3. Derogatory marks
4. Credit age
5. Total accounts
6. Hard Inquiries

As you will see, these factors also differ in how much they affect your score. Some will make more of an impact like payment history and others will make less of an impact like hard inquires.

Seeing 6 factors makes credit seem less overwhelming since you only have 6 things to work on improving.

Payment History

Payment history makes a huge impact on your credit score. It’s well known it contributes almost a third of your score so making sure you pay bills on time is incredibly important.

Even one late payment can injure your credit score and drop it by many points. It’s important that you always pay your bills on time and if you are late on any payments you make sure you try to correct or dispute it.

Remember that a single 30 or 60 day missed payment is easy to recover from in the long run but will initially hurt your score a lot. A 90 day missed payment can be so damaging it leads certain loans and lenders to disqualify you automatically. This is all calculated via a formula that includes all possible payments on all accounts so the more missed payments you have the worse it will be and the harder it will be to recover.

Lenders want to know that you will pay your bill on time so make this your highest priority when thinking about credit.

• Action steps: Set up auto pay for as many bills as possible and set calendar reminders for due dates to make sure things get paid on time.

Credit Card Use

Credit card use or credit utilization is the calculation of how much of your credit you are actually using. Credit card use is a good way to measure this because credit cards are a line of credit where you have access to a lot of credit and can use it – or not.

Credit card utilization matters most for each individual card but your score also takes into account the average use across all cards and lines of credit.

The goal is to stay under 30% of your credit used and 10% is ideal. You don’t have to carry credit card debt or pay interest in order to build credit. You can open a couple cards and charge just a small amount and pay it off every month.

• Action tip: Calculate your utilization rate for each credit card and then work on a plan to pay down balances to 10%.

Derogatory Marks

Derogatory marks like collections, bankruptcies, civil judgements and tax liens are all things that are negative and can negatively affect your credit score for a long time. These can stay on your credit report for 7-10 years so it’s best to avoid or remove them if possible.

Debt collections have to have proof that you own the debt and everything is accurate so you can work through the process of verifying, disputing, and settling your debt.

If it’s over a couple years old you may also just decide to let it fall off your credit report. The older a collections account is the less it will affect your credit score.

• Action steps: Make a list of all the derogatory marks on your credit report. Start working on improving them by using the “pay for delete” method for collections.

Credit Age

Credit age is another important factor because creditors like to know that you are going to be using credit wisely for a long period of time before they lend to you.

Experience handling credit is important and to show this you should always keep your oldest accounts open. I cringe when people pay off their credit cards then close the accounts because they hurts you so much in the long run.

Make sure you keep your oldest credit card open and use it for 1 small thing every since month so it is active and not auto closed.

• Action step: There isn’t much you can do here other than make sure you take out credit early and keep it active!

Total Accounts

The total number of accounts you have is another factor in your credit score but this one has a low impact on your actual score.

Having different type of accounts like credit cards and installment loans is a factor in your score. This is something people generally build over time as they open more accounts with different types of credit.

Personally I’ve seen that you generally want at least 2 credit cards in use and one installment loan in order to have the best credit.

• Action step: Make a plan to strategically increase your accounts by opening a new line, but don’t just rush out and open multiple at once!

Hard Inquiries

Hard inquiries are a factor in your credit score and while they have a low impact, having too many can drop your credit score.

Luckily unlike the other factors this is usually a temporary drop and will even back out after about three months.

As you can see from my credit score slide above, we recently applied for a new refinanced mortgage which is why we had more inquiries and our score dropped temporarily.

• Action step: Only apply for credit when you absolutely need it and try to plan ahead to minimize these inquiries in the year before you get a mortgage.

Building Your Credit

If you are struggling to build or repair credit then this should give you a good start to work on improving your credit. By focusing in on 6 different elements you are able to eliminate things that don’t matter but could waste your time.

I recommend you start from the top of the list and then work your way down. You will get the most improvement from your efforts if you focus on what affects your score the most. This means getting organized and making a plan to strategically pay off debts and increase your credit score!

In the United States our society is increasingly built around using credit to make not only purchases but financial decisions about people. Credit scores are used for more than just getting a credit card – they are used for a number of things from getting a home to getting a job.

Credit scores demonstrate your “credit worthiness” which shows your history of paying off debts as an indicator that you are responsible with your finances.

For most people having a good credit score gives you amazing benefits.

Why do you need a GOOD credit score? 

The unfortunate reality is that your credit score matters. 

Good credit gets you access to better rates, allows you to pay less on big items like homes and cars, and even determines your ability to qualify for certain jobs or rentals. 

You don’t have to love debt or need credit card debt to get a good credit score. In fact, I hate debt. But I also live in the real world and out here your credit score is a tool that can open up doors to a better experience in life.

Having no credit sounds like an amazing idea but in the real world it makes things much harder. You will have access to fewer companies when you apply for a mortgage because many won’t do manual underwriting. You’ll  have access to less rental options because many landlords don’t want to (or can’t) go through the hassle of evaluating your finances and manually approving you. 

The fact of the matter is that having good credit opens up doors for you.

Benefits Of Having A Good Credit Score

Here are a few reasons why building a good credit score is important:

• Good credit will get you better interest rates when you need credit for financing a large purchase.
• Good credit means you will pay less overall on those big purchases you have to make on credit.
• Buying a home requires a credit score with most lenders and the better your credit score, the better loan you will be able to get. 
• Having bad credit can stop you from being able to buy a home at all until you improve it.
• Your credit score determines your ability to rent an apartment and many won’t accept below 700.
• Your credit score can affect getting certain jobs in certain industries where you have to appear trustworthy.

Let’s look at the benefits of having good credit in more detail.

Credit Affects Your Ability To Get A Mortgage

The most obvious area where having good credit matters is when you are wanting to get a loan to buy a home. Mortgage lenders base their decisions off many factors about your finances including credit scores.

Most mortgage products have a minimum credit score you must have in order to qualify. If you don’t have good credit you can’t qualify for the best mortgage loans and have to accept more expensive products with worse rates.

The interest rate you get on a mortgage is dependent on your credit score and that interest rate will directly impact how much you are paying each month on your mortgage. Low credit scores end up being very expensive when you learn how much extra interest you have to pay.

You Can’t Even Rent With Bad Credit

When you have bad credit you won’t even be able to rent certain apartments. Landlords can use your credit to decide whether they want to rent to you or not and many large apartment buildings have minimum required credit scores.

If you want to live in a certain area you may need to have good credit to be approved as a renter. Property rental is considered as a loan in some way and landlords want to make sure your credit is good enough that they will get paid each month.

Auto Loans Require Good Credit

Most people are not able to buy a car in cash in addition to their regular monthly expenses. It can take a long time to save up enough money to buy a car in cash and many people need to have a car to get to work before that.

Because it is difficult to buy a car in cash most people apply for a car loan in order to purchase a car. Your credit score will greatly affect whether this is a good idea or not because a good credit score means you can finance for nearly 0% interest but a bad credit score means you will pay much, much more.

Bad credit will cost you more when you get a car loan and can affect if you even get qualified and if you even qualify a bad credit score will limit the amount of money you can borrow. Bad credit scores limit your choices and end up costing you much more money.

Credit Can Affect Your Employment

Not ever employer checks your credit but many employers have started conducting credit checks as part of your hiring process. Employers will pull your credit report and evaluate your ability too pay back debt and handle your finances.

A bad credit history may convince an employer that you are not going to be able too handle the salary they can offer or you may be a risk in some way depending on the type of work. Employers may be hesitant to hire you when you have a bad credit history.

Credit Scores Affect Car Insurance Rates

Did you know that your credit score can affect your auto insurance rates? When you apply for new insurance the insurance company will check your credit in order to determine your rates.

Insurance companies will use information from your credit report and insurance history to develop your insurance risk score, which often penalizes people with low credit scores. If you have bad credit you will end up paying more for your insurance premiums than someone who has good credit. People with good credit scores routinely pay less for their insurance than similar applicants with lower credit scores.

Business Loans Require Good Credit

If you are planning to start a business and plan to take out a business loan then you will need good credit personally. When you are taking on business debt lenders will be using your personal information and credit profile to make their decisions in addition to your business plan.

Having good credit can help you start a business that eventually makes you more money than you would have made in a traditional job. Having bad credit can prevent you from doing this or make it more risky by taking on higher interest loans that put more stress on your new business.

Credit Can Affect Your Daily Living

While many services do not report your payments to the credit bureaus they do use your credit to determine factors about your account or whether or not they will establish you as a customer.

Utility companies will check your credit in order to see if you will be a customer that pays on time or not. Most utility services will conduct a credit check – from cable to cell phone providers to water.

Because all of these services check your credit it can be more expensive and difficult to afford normal living expenses if you have bad credit. Having bad credit shows your level of financial responsibility so having good credit will indicate to any service you need that you will be a responsible and worthwhile customer.

Having Good Credit Makes Life Easier

Clearly having good credit is important. It affects many areas of your life and having bad credit will force you to pay more for the same things others get at a much lower overall cost.

The good news is your credit score is something you can work to improve!

Here are a few posts where you can find tips to improve your credit score:

• How To Improve You Credit Score
• Favorite Credit Improovement Tools

While you can’t improve your bad credit overnight you can start taking steps to improve your credit history and credit score today. In a few months you’ll start to see you credit improving and eventually you’ll have all the benefits of good credit too!