As mortgage rates hit new records by more than twelve times, millions of people have already refinanced their mortgages and millions more could save by doing so.
Use Money’s refinance calculator to determine if refinancing is right for you.
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How Money’s Refinance Calculator Works
Our refinance calculator can help you determine how much you could save by refinancing. Simply enter the details of your current mortgage and your new home loan.
Before you start looking for a lender, we recommend that you consult our research on the Best mortgage lenders of 2022 to find the best rates for your location, credit score, loan amount and type.
What is mortgage refinancing?
Mortgage refinancing involves taking out another mortgage to pay off your existing mortgage balance. Ideally, this new loan will have a shorter term, a lower total interest rate, or both, resulting in significant long-term savings.
How does refinancing work?
Refinancing is an option for people who want to pay off their mortgage sooner, reduce their current monthly payment, or tap into their home equity for cash.
Home equity is calculated by dividing the value of the home between what you currently owe on your mortgage.
To refinance a mortgage, you will need to go through the application and eligibility process, just like when you took out your original loan. After loan approval, you will pay off your old loan and continue monthly payments on your new mortgage for the duration of the term.
How much does it cost to refinance?
According to Freddie Mac, the average closing cost for a mortgage refinance is around $5,000. But keep in mind that closing costs vary depending on the loan amount and the condition of the property.
Here are the standard costs included in your refinance loan closing disclosure:
- Expert fees: A professional appraiser examines the property and estimates its market value
- Lawyer’s fees: A lawyer prepares documents and contracts – not all states require the services of a lawyer
- Escrow Fees: A commission paid to the real estate agency or agent in charge of concluding the loan
- Insurance costs: Home insurance must be up to date
- Points: Also known as discount points, these are used at closing to reduce the interest rate of the loan – each point equals 1% of the loan amount and its purchase is optional.
- Subscription fees: Covers loan application assessment fees
- Tax Service Fee: Fees to ensure borrowers pay required property taxes
When should you refinance your mortgage?
It’s not always a good idea to refinance your current home, but it can be a smart financial decision under the right conditions.
Refinancing a mortgage makes sense if you can achieve one of the following goals:
Low interest rates
Locking in a new lower interest rate can result in:
- A lower monthly payment
- Pay less over the life of the mortgage
To qualify for the lowest possible refinance rates, you will generally need to have a credit score of at least 740.
Shorter loan term
Spreading your loan balance over a shorter loan term will:
- Help you pay off your mortgage faster
- Reduced interest payment over the life of the loan
Annual percentage rates are also generally lower for 15-year loans than for 30-year loans. This option is best for those who have few long-term financial obligations and can afford the monthly mortgage payment.
Get the money you need now
For cash refinance loans:
- Most banks will require you to keep at least 20% equity in the house
- High credit score requirements
Interest rates on cash refinance loans also tend to be higher. Most borrowers opt for this type of refinancing to cover home improvement expenses or to consolidate debt.
Getting out of mortgage insurance payment
On conventional loans, private mortgage insurance (PMI) should be automatically canceled once you reach 80% of the equity in your home. However, with a FHA loan, you must pay mortgage insurance premiums (MIP) for the term of the loan.
If you have sufficient equity and can qualify, it may be advantageous to refinance a conventional loan. The FHA mortgage insurance premium ranges from 0.45% to 1.05% of the loan amount each year.
Switch from a fixed rate mortgage to an adjustable rate mortgage
With a fixed rate mortgage, your interest rate and monthly mortgage payments will stay the same for the life of the loan (that is, until you sell, refinance, or finish paying). Because of this predictability, fixed rate mortgages are the best option for most borrowers, especially when rates are low and if they plan to stay in their home for a long time.
Refinancing can help you save money on your mortgage payment.
With rates hitting record highs, refinancing could save you money by helping you get a lower interest rate. Click below to get a quote.
When is refinancing your mortgage a bad idea?
Refinancing your current loan may not make sense in all scenarios. If the cost of the new loan exceeds the amount you would save by refinancing, your financial situation is uncertain, or your credit score has dropped, refinancing may not be the best choice.
Other reasons why refinancing may not be the best option include:
If you plan to move soon
If you plan to sell in the next few years, the monthly savings from refinancing may not exceed the total cost of refinancing your loan.
To find out the break-even point for your new loan, add up the closing costs, which can include appraisal fees, title and credit report fees, and origination fees – about 1% of the loan amount – and divide it by the amount you save per month with the new payment.
According to Freddie Mac, the average closing cost for a mortgage refinance is around $5,000. If you plan on staying in the house for less time than it would take to recoup what you would have spent on closing costs, refinancing may not be a good deal.
If your credit score has dropped
When you apply for a refinance loan, lenders partly determine your creditworthiness by looking at your credit score. The higher your credit score, the better your chances of getting a low rate.
If your credit score is lower than when you bought your home, you may not qualify for a lower rate. If your score is low enough, you may want to work on improving your credit before refinancing.
How do I qualify for a mortgage refinance?
When applying for a new mortgage or refinance loan, three main factors will affect your rates:
- Debt to income ratio
- Credit score
- Loan-to-value ratio
Although credit score requirements vary by lender and loan type, a higher score will always mean a better rate. If you think your credit needs improvement, there are ways to improve your score, such as checking your report for errors and getting them corrected.
Consult the three free copies of your annual credit reports on annualcreditreport.com.
Ultimately, the best way to improve your score is to develop good long-term credit habits, like paying your bills on time and monitoring your credit utilization rate. It’s important to be patient, because improving your credit score will take time.
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