In a Nutshell There can be many options to consider when deciding if it’s worth refinancing your mortgage. When deciding whether to refinance, it’s important to take into account a number of factors, including your credit scores, the value of your house, trends in mortgage rates, and even when you plan to move. Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect.
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An in-depth analysis to help you decide whether refinancing your mortgage is the right move for you.
Saving $200 a month on your mortgage payment is a significant amount of money, and it’s natural to wonder if refinancing your mortgage is the right way to achieve this savings. The answer, however, is not a simple yes or no. It depends on a variety of factors, including your current mortgage rate, the new rate you can qualify for, the closing costs associated with refinancing, and your plans for the future.
Let’s break down the key considerations to help you make an informed decision
1 Evaluate Your Equity
Before you even consider refinancing, it’s important to understand how much equity you have in your home. Equity is the difference between the current market value of your home and the amount you still owe on your mortgage. The more equity you have, the more favorable your refinancing options will be.
For example, if your home is currently worth $200,000 and you owe $150,000 on your mortgage, you have $50,000 in equity. This means you have a 25% equity stake in your home. Lenders typically require borrowers to have at least 20% equity to qualify for a refinance.
2. Calculate Your Loan-to-Value (LTV) Ratio
Your LTV ratio is another important factor to consider It’s calculated by dividing the amount you owe on your mortgage by the current market value of your home. A lower LTV ratio means you have more equity and are less risky for lenders.
In the example above, your LTV ratio would be 75% ($150,000 / $200,000). This is a relatively low LTV ratio, which means you would likely qualify for a refinance with a competitive interest rate.
3. Find Your Break-Even Point
Refinancing your mortgage comes with closing costs, which can range from 2% to 5% of the loan amount. These costs can include origination fees, appraisal fees, title insurance, and attorney fees.
To determine if refinancing makes sense, you need to calculate your break-even point. This is the amount of time it will take for your monthly savings from the lower interest rate to offset the closing costs.
For example, if your closing costs are $5,000 and you are saving $200 a month on your mortgage payment, your break-even point would be 25 months ($5,000 / $200). This means it would take you 25 months to recoup the closing costs and start saving money on your mortgage.
4. Consider Your Future Plans
If you plan on staying in your home for the long term, refinancing to save $200 a month is likely a good idea, especially if your break-even point is relatively short. However, if you plan on moving within the next few years, it may not make sense to refinance, as you may not have enough time to recoup the closing costs.
5. Shop Around for the Best Rates
It’s important to shop around with multiple lenders to get the best possible interest rate on your refinance. Don’t just accept the first offer you receive. Compare rates and terms from different lenders to find the best deal for your situation.
6. Consider Other Options
Refinancing isn’t the only way to save money on your mortgage. You could also consider making extra payments towards your principal, which would help you pay off your mortgage faster and save on interest. You could also try negotiating a lower interest rate with your current lender.
Ultimately, the decision of whether or not to refinance to save $200 a month is a personal one. There is no right or wrong answer, and the best decision for you will depend on your individual circumstances.
Here are some additional resources that you may find helpful:
- Is it worth refinancing to save $50, $100, or even $200 a month? (Quora)
- How Much Could You Save By Refinancing Your Mortgage? (FSB Blog)
You have an existing home equity loan
If you want to refinance your loan, you might need to get permission from the lender if you have a home equity loan or line of credit, or HELOC. If it doesn’t agree, you might have to pay this account off before you can refinance.
Types of mortgage refinancing
The method you select for refinancing your mortgage will rely on your loan type and financial objectives.
Here are six different options to consider.
- Conventional loan refinancing: This involves paying off your current conventional loan and taking out a new one in its place. Most do this in order to switch to a new loan type or to benefit from lower interest rates. If you have a conventional loan, your mortgage is not covered by any government initiatives.
- Cash-out refinance: This type of refinance enables you to access your home’s equity. You will receive the difference in cash when you take out a new loan that is larger than what you owe on your mortgage. Some people use this to finance home renovation projects or pay off debt.
- FHA Streamline Refinance: This type of refinance lets you refinance your existing FHA loan with the least amount of underwriting and credit requirements. You need to have a current FHA loan in order to be eligible. Additionally, you must gain something from the refinance; for example, you might be eligible for a new loan type or a lower interest rate.
- VA interest rate reduction refinance loan (IRRRL): Borrowers with VA loans who wish to reduce their monthly payments can apply for an IRRRL type of mortgage refinance. If you currently have a VA loan and the mortgage you’re refinancing is for your primary residence, you might be eligible.
- Refinancing with an FHA cash-out enables you to access the equity you have accrued in your FHA loan. You must fulfill specific debt-to-income and credit requirements in order to be eligible.
- VA cash-out refinance: This type of refinance enables you to take advantage of the equity in your existing loan. Refinancing a non-VA loan into a VA loan is one benefit of a VA cash-out refinance.
Refinancing, just like applying for a mortgage, can take significant time and effort. Before beginning the process, determine whether the savings would outweigh the additional work required to gather additional documentation and spend time learning about your options.
Additionally, since your credit can affect your interest rate, you should know what kind of shape it’s in. Before you refinance, you might want to take action to raise your credit score if it’s not in very good standing.
And if you ultimately determine that refinancing your mortgage is worthwhile, you can begin by using Credit Karma to compare current mortgage rates.
Is it worth refinancing to save $200 a month?
FAQ
Does refinancing actually save you money?
How much savings is worth refinancing?
At what point is it not worth it to refinance?
Is it worth refinancing to save 1%?
Can refinancing save money?
For example, if you can save $200 per month by refinancing, but pay $6,000 in costs to get the savings, your break-even point is 30 months ($6,000/$200 = 30 months). If you stay in the home at least 30 months, you’ll save money by refinancing. If not, skip the refinance.
Is a refinance worth it?
This means that even in a rising-rate environment, a refinance is still worthwhile for some homeowners. If you think you could get even a slightly lower rate, check to see if a refinance is worth it based on your new rate and savings. In this article (Skip to) Is it worth to refinance for 1 percent?
Can I refinance my home if I owe $100,000?
If you owe $100,000 on your existing mortgage and your home is only worth $100,000, you won’t qualify for a cash-out refinance. Most lenders will only loan up to about 80% of your home’s value as a cash-out refinance. The lower the interest rate on your mortgage, the lower your monthly payment will be.
Should you refinance a 30-year loan?
The two-year rule says that, generally, the interest you save over the first two years should be equal to or more than your total refinance closing costs. Use the “two-year rule” when refinancing into a shorter loan term. You likely won’t save money on your monthly payment by converting your 30-year loan into a 15- or 10-year one.