Refinancing a mortgage can be a great way to lower your monthly payments, especially when interest rates are low. Over the past year, refinancing has increased by 150% as homeowners have taken advantage of the low interest rates caused by the COVID-19 pandemic.
While refinancing is a complex process, weighing several factors can help you determine if it’s the right choice for you. Here are some things to keep in mind as you think about refinancing.
The Value of Your Home Equity
One of the most important things to consider when it comes to refinancing is your home equity. This is the value of your home minus any existing mortgages or loans. While your home equity generally increases as you pay down your mortgage, it can also fluctuate as a result of changes within the housing market.
With home prices seeing significant spikes over the past year, your home equity may be higher than it has been in the past. In fact, research shows that U.S. homeowners saw their equity increase by a total of $1 trillion between 2019 and 2020.
Having at least 20% equity in your home will help you get the best rate when refinancing so it’s important to have a sense of your home’s current value and the value of your equity.
How Long You Plan to Stay in Your Home
Another important factor to think about is how long you plan to stay in your home. While there is no set time frame required for refinancing, staying in your home for several years can help you achieve greater savings and recoup any closing costs.
Depending on your new rate and your mortgage term, this can be anywhere from three to five years (or longer). A good way to determine the exact number is to calculate your break-even point.
Your Break-Even Point
A common refinancing term, the break-even point is the point at which your refinancing costs are covered by your monthly savings. A simple way to think about this is that if your refinancing costs add up to $5,000 and you save $200 a month, it will take you 25 months to break even.
While calculating your break-even point can be complex, the right tools can make it easier. To help homeowners make the best decisions regarding refinancing, Credit Karma has created a refinancing calculator that can help you determine whether your mortgage is worth refinancing.
With more than 100 million members, Credit Karma also offers members a personalized experience for finding the best mortgage or refinancing loan. Their calculators, rate tables, and equity tracker can help you visualize your options easily so you can make a decision that’s right for you. What’s more, Credit Karma compares rates from dozens of lenders and offers a simple breakdown of your potential monthly payment and upfront fees.
Refinancing your home requires careful consideration and a clear understanding of what will benefit you in both the short and long term. Having the right information at your fingertips can make that process easier. By accessing Credit Karma’s suite of resources, you can make an informed decision and find the right lender.