With mortgage rates hitting new record lows over 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 whether refinancing is right for you.
How Money’s Refinance Calculator Works
Our refinance calculator can help you find out how much you could save by refinancing. Just enter the details about your current mortgage and new home loan.
Before you start shopping around for a lender, we recommend you check out 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 is when you take out another mortgage loan to pay your existing mortgage balance. Ideally, this new loan will have a lower term, 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 in a shorter period of time, lower their current monthly payment, or tap into their home equity for cash.
Home equity is calculated by dividing the home value between what you currently owe on your mortgage.
To refinance a mortgage, you’ll have to go through the application and eligibility process, just like when you took your original loan. After loan approval, you’ll pay your old loan and continue with the monthly payments of your new mortgage for the duration of the term.
How Much Does it Cost to Refinance?
According to Freddie Mac, the average closing costs for a mortgage refinance are approximately $5,000. But keep in mind that closing costs vary depending on the loan amount and the state where the property is located.
Here are the standard costs included in your refinance loan’s closing disclosure:
- Appraisal fee: A professional appraiser looks at the property and estimates its market value
- Attorney fees: An attorney prepares documents and contracts — not all states require the services of a lawyer
- Escrow fee: A fee paid to the real estate agency or attorney in charge of closing the loan
- Insurance fees: Homeowners insurance must be current
- Points: Also known as discount points, these are used during the closing to lower the loan interest rate — each point equals 1% of the loan amount, and its purchase is optional
- Underwriting fee: Covers the cost of evaluating the loan application
- Tax service fee: A fee to make sure that the borrowers pay the 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 wise financial move under the right conditions.
Refinancing a mortgage makes sense if you can achieve one of the following:
To lock a lower new interest rate can result in:
- A lower monthly payment
- Paying less over the mortgage term
To qualify for the lowest possible refinance rates, you’ll 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 your mortgage off faster
- Lower interest payment over the loan’s term
Annual percentage rates are also generally lower for 15-year loans than for 30-years. This option is best for those who have few long-term financial obligations and can afford the monthly mortgage payment.
Obtain the cash you need now
For cash-out refinance loans:
- Most banks will require you to keep at least 20% equity in the home
- High credit score requirements
Interest rates on cash-out refinance loans also tend to be higher. Most borrowers opt for this type of refinancing to cover home renovation expenses or to consolidate debt.
Get out of paying mortgage Insurance
On conventional loans, private mortgage insurance (PMI) should be automatically canceled once you’ve reached 80% equity in your home. However, with an FHA loan, you are required to pay mortgage insurance premiums (MIP) for the life of the loan.
If you have enough equity and can qualify, it can pay to refinance a conventional loan. The FHA mortgage insurance premium ranges from 0.45% to 1.05% of the loan amount each year.
Switch to a fixed-rate mortgage from an adjustable-rate mortgage
With a fixed-rate mortgage, your interest rate and monthly mortgage payments will remain the same for the life of the loan (i.e., until you sell, refinance or finish paying). Due to that 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.
When is Refinancing Your Mortgage a Bad Idea?
Refinancing your current loan may not make sense in every scenario. If the cost of the new loan will exceed how much you’d save by refinancing, if your financial situation is uncertain, or if your credit score has taken a dip, refinancing may not be the smartest choice.
Other reasons when refinancing might not be the best option include:
If you’re planning to move soon
If you’re planning to sell in the next few years, the monthly savings by refinancing may not exceed the total cost to refinance your loan.
To find out your new loan’s break-even point, add up the closing costs, which can include appraisal fees, title and credit report fees, and origination fees — around 1% of the loan amount — and divide them by the amount you’d be saving per month with the new payment.
According to Freddie Mac, the average closing costs on a mortgage refinance are around $5,000. If you’re planning to stay in the home for less time than it would take you to get back what you would spend on closing costs, refinancing may not be a good deal.
If your credit score has gone down
When you apply for a refinance loan, lenders determine your creditworthiness in part by looking at your credit score. The higher your credit score, the better your chances of snagging 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 impact 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 feel your credit needs improvement, there are ways to gradually improve your score, such as checking your report for errors and getting them corrected.
Check out all three free copies of your annual credit reports from 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 keeping tabs on your credit utilization rate. Being patient is important because improving your credit score will take time.