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:

Application fees

Application fees cover the initial costs of processing your loan. If your loan isn't approved, you may still have to pay this fee.

Appraisal fees

Before approving your loan, your lender may need to order a home appraisal to determine your property's market value. Your lender will take the appraised value into account when deciding if you're eligible for a refinance.

Credit report fee

Lenders charge this fee to look at your credit report from each of the 3 major credit agencies.

Mortgage points

You may decide to pay points for a lower interest rate on your loan. Mortgage points are usually collected at closing as part of the borrower's closing costs.

Learn more about mortgage points

Flood certification fee

Before approving your loan, a lender will need to find out whether the home is in a flood hazard area. If it is in a flood hazard area, flood insurance will be required in addition to your homeowners insurance.

Mortgage taxes

In some states, you could pay a transfer tax in addition to the recording fee when you refinance a property. This mortgage tax can be based on the loan amount or on the difference between the amounts of the new refinancing loan and the previous loan. The mortgage tax is part of the borrower's closing costs.

Owners title insurance

In addition to lender-required title insurance, property owners can obtain title insurance to protect against any disputes that may arise regarding ownership of the property, including fraudulent claims against ownership, liens, and undisclosed heirs, as well as certain boundary disputes.

Recording fees

As part of the mortgage lending process, you will give the lender a mortgage on the property. The mortgage is recorded in the public records and provides notice of the transaction to other interested parties. The fee varies by county and is based on the number of pages being recorded.

Settlement fee

Title companies or attorneys charge a settlement fee to conduct the mortgage closing, when you sign the mortgage loan documents so the mortgage can be recorded and loan funds paid on your behalf.

Tax service fee

Your lender may use a tax service agency to ensure that property tax payments are made on time and to prevent tax liens from occurring. The tax service fee covers this cost.

Title insurance

Lenders require title insurance on the property to protect against adverse claims to the lender's mortgage interest in the property. This fee is part of the borrower's closing costs and is collected at closing.