WWith mortgage rates hitting new record lows more than 12 times, millions of people have already refinanced their mortgages and millions more could save as a result.

Use Money’s Refinance Calculator to determine if refinancing is right for you.

This is how Money’s refinancing calculator works

Our refinance calculator will help you figure out how much refinancing could save you. Simply enter the details of your current mortgage and new home loan.

Before you start looking for a lender, we recommend checking out our research on the best mortgage lenders of 2022 to find the best rates for your location, credit rating, loan amount, and type.

What is mortgage refinancing?

With a mortgage refinance, you take out another mortgage loan to pay off your existing mortgage loan. Ideally, this new loan will have a shorter term, a lower overall interest rate, or both, resulting in significant long-term savings.

How does refinancing work?

Refinancing is an option for people looking to pay off their mortgage in less time, lower their current monthly payment, or use their home equity for cash.

Home equity is calculated by dividing the home value by what you currently owe on your mortgage.

To refinance a mortgage, you must go through the application and approval process just like you did when you took out your original loan. After the loan approval, you pay off your old loan and continue making monthly payments on your new mortgage for the duration of the term.

How much does the refinance cost?

According to Freddie Mac, the average closing cost for a mortgage refinance is about $5,000. Keep in mind, however, that closing costs will vary depending on the loan amount and the state in which the property is located.

Here are the standard charges included in the closing disclosure of your refinance loan:

• Valuation fee: A professional appraiser will look at the property and estimate its market value
• Legal Fees: A lawyer prepares documents and contracts – not all states require the services of a lawyer
• Escrow fee: A fee paid to the real estate agency or solicitor in charge of closing the loan
• Insurance Fees: Homeowners insurance must be current
• Points: Also known as discount points, these are used during closing to lower the loan interest rate – each point is equal to 1% of the loan amount and its purchase is optional
• Subscription fee: Pays for the cost of reviewing the loan application
• Tax Service Fee: A fee to ensure borrowers pay required property taxes

When should you refinance your mortgage?

Refinancing your current home isn’t always a good idea, but given the right conditions, it can be a smart financial move.

Refinancing a mortgage makes sense if you can achieve one of the following goals:

Low interest rates

Setting a lower new interest rate may result in:

• A lower monthly payment
• Pay less during the term of the mortgage

In general, to qualify for the lowest possible refinance rates, you need 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
• Lower interest payment over the life of the loan

APRs are also generally lower on 15-year loans than on 30-year loans. This option is best for those who have few long-term financial commitments and can afford the monthly mortgage payment.

Get the money you need now

For refinance loans with disbursement:

• Most banks require you to keep at least 20% equity in the house
• High credit requirements

Interest rates on cash-out refinance loans also tend to be higher. Most borrowers choose this type of refinance to meet renovation costs or to consolidate debt.

Get out of mortgage insurance

With traditional loans, Personal Mortgage Insurance (PMI) should be canceled automatically once you reach 80% equity in your home. However, with an FHA loan, you must pay mortgage insurance premiums (MIP) for the life of the loan.

If you have enough equity and can qualify, it may be worth refinancing a traditional loan. The FHA mortgage insurance premium ranges from 0.45% to 1.05% of the loan amount each year.

Switch from an adjustable rate mortgage to a fixed rate mortgage

With a fixed-rate mortgage, your interest rate and monthly mortgage payments remain the same for the life of the loan (that is, until you sell, refinance, or complete payment). Because of this predictability, fixed-rate mortgages are the best option for most borrowers — especially when interest rates are low and 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 exceeds the savings from a refinance, your financial situation is uncertain, or your credit rating has declined, refinancing may not be the wisest choice.

Other reasons refinancing may not be the best option include:

If you are planning to move soon

If you plan to sell in the next few years, the monthly savings from refinancing cannot exceed the total cost of refinancing your loan.

To determine breakeven on your new loan, add up the closing costs, which can include appraisal fees, title and credit report fees, and processing fees — about 1% of the loan amount — and divide by the amount you would have with the new payment save per month.

According to Freddie Mac, the average closing cost of a mortgage refinance is around $5,000. If you plan to stay indoors for less time than it would take to get back what you would spend on closing costs, refinancing may not be a good deal.

If your credit rating has declined

When you apply for a refinance loan, lenders determine your creditworthiness based in part on your credit history. The better your credit score, the better your chances of getting a low interest rate.

If your credit score is lower than when you bought your home, you may not qualify for a lower interest rate. If your score is low enough, you should work on improving your credit score before refinancing.

How do I qualify for a mortgage refinance?

When applying for a new mortgage or refinance loan, three main factors affect your interest rates:

• Debt to Income Ratio
• credit-worthiness
• loan-to-value ratio

Although credit score requirements vary by lender and loan type, a higher score always means a better rate. If you think your credit score needs improvement, there are ways to gradually improve your score such as: B. by checking your report for errors and having them corrected.

Check out all three free copies of your annual credit report from annualcreditreport.com.

Ultimately, the best way to improve your score is to develop good long-term lending habits, such as: B. Pay your bills on time and keep an eye on your credit utilization. Patience is important as improving your credit score will take time.

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