Thinking of Refinancing?

What is equity?

Equity is the dollar-amount difference between your home's value and the total amount you owe on your mortgage.

For example, if your current mortgage balance is $80,000 and your home value is $100,000, your equity is $20,000. The amount of equity you've built in your home can affect your refinance options.

Loan-to-value (LTV) ratio

While equity shows the difference between your property value and your mortgage balances in dollars, the loan-to-value (LTV) ratio shows this difference as a percentage. A mortgage with an 80% LTV means the mortgage amount is 80% of the property's value.

If your LTV is higher than 80% you'll likely have to pay mortgage insurance to protect your lender against nonpayment or default. Mortgage insurance would be included in your monthly payment.

Calculating your LTV ratio

You can get your LTV ratio by dividing your mortgage amount by your home's appraised value or selling price (whichever is less).

For example, if your current mortgage balance is $80,000 and your home value is $100,000, your LTV ratio calculation would be:
$80,000 ÷ $100,000 = 0.8 (80%).
Based on that calculation, 80% of the home's price is borrowed and $20,000 is equity.

Before refinancing, you should think about how long it will take to reach your "break-even point", when your new monthly savings equal your refinancing costs. It often takes 2 to 3 years to break even, depending on your refinancing costs and how much you save. So if you plan on selling your home before your break-even point, you may not want to refinance.

The break-even point calculation

Calculate your break-even point by dividing your refinance costs by the amount you'll save each month with your lower mortgage payment.

For example, if your refinance costs total $5,000 and a refinance mortgage will save you $200 a month, your calculation would be:
$5,000 ÷ $200 = 25 months until you break even.
If you don't plan on staying in your house for that long, refinancing might not make sense in the long run.

Refinancing, like a new home purchase, comes with additional costs such as application and closing fees.

After you submit your refinance application, your lender will send you a Loan Estimate that itemizes the estimated fees and costs you can expect to pay. Here is a list of the refinancing costs so that you can budget for them.

Refinancing costs generally include: