Are you thinking of refinancing your home? Use this calculator to discover how much you can save today.
Refinancing is when a homeowners takes out another loan which is used to pay off their first mortgage & any secondary liens on their home. Mortgage refinancing allows homeowners to leverage the equity in their home to improve their personal finances.
Common use cases include:
Before the 2008/2009 financial crisis most homeowners either moved or refinanced their loans about once every 7 years. Since the recession a greater share of output has went to capital while a lower share has went to labor. In uncertain labor markets homeowners with debt are more likely to stay in place longer.
Rates have been falling on a secular basis for over 3 decades. If rates fall significantly homeowners can refinance to lock in a lower rate. That, in turn, drives down their monthly payments and interest expenses.
Refinancing a home still has closing costs, so typically rates need to fall about a half-percent to cover the closing costs and help a homeowner save money.
If interest rates rise homeowners have little financial incentive to refinance their homes unless they have an adjustable-rate loan & they think the rates will rise further. In that case they might choose to switch from an ARM to a FRM.
When the mortgage market is booming about 70% of mortgages are refinances. When interest rates are rising and loan volume stagnates then the market may flip in the other direction to where about 70% of loans are for home purchases. In June 2018 29% of mortgages were refis.
The vast majority of the US residential mortgage market uses fixed-rate loans in low-rate environments & most of those loans use a 30-year term. In June 2018 the average 30-year note rate was 4.92%, which is still quite low based on historical averages.
When interest rates jump sharply - as they did in the early 1980s - consumers typically shift preferences toward adjustable-rates. As of June 2018, 6.9% of all home loans are structured using ARMs. ARMs are relatively uncommon for VA (0.5%) & FHA (0.6%) loans, while slightly more common among conventional home loans (7.6%).
As of the end of Q1 in 2018 there is an estimated 138 million housing units across the United States & the total value of all U.S homes is $31.8 trillion. As of Q1 2018 there is about $15 trillion in outstanding mortgage debt across the United States, slightly surpassing the 2008 peak of $14.8 trillion.
According to the 2012-2016 American Community Survey 5-Year Estimate the housing stock is broken down as follows
Among the owner-occupied properties with mortgage debt, the breakdown is as follows
Typically refinancing is easier than purchasing a home as the lender has higher profit margins due in part to fewer parties engaged in the transaction & relying on some of the work done on the original mortgage.
Home equity loans & home equity lines of credit (HELOC) are both treated similarly to a mortgage in that they are liens on the property. However, there are some substantial differences between the three options.
Refinancing makes sense if you are certain you will live in the home for years to come and you want to withdraw a significant amount of equity or are pushing to significantly lower the interest rate on your existing loan. Refinancing is similar to a purchase mortgage in terms of having a significant upfront cost in terms of both time and money.
Home Equity Loans
Home equity loans are far easier to obtain than a full on refinance & they have a far lower upfront expense as only a portion of the home's equity is being converted to cash.
Typically banks will allow homeowners to withdraw somewhere between 70% to 95% of their home's total value, depending on their credit score and other factors. The ratio of debt to home price is called loan to value (LTV).
If a home is worth $250,000 and it had a first mortgage with $150,000 of debt on it that would leave $100,000 in remaining equity. At 70% of the home's value a homeowner could cash out an additional $25,000 on top of the $150,000 they owe on their first mortgage. At 95% a homeowner could cash out up to $87,500.
Home equity loans are typically structured as a fixed upfront loan amount which then charges a fixed-rate of interest & fixed payments that amortizes over a fixed-term like 5 or 10 years.
Home Equity Lines of Credit
Home equity lines of credit act similarly to a credit card. A homeowner is authorized to borrow up to a cap or limit over some period of time like 5 years. Each time the money is repaid the cap still remains & can be used again.
Homeowners are not charged any interest until they draw on the line & then they are charged a variable rate which changes as the broader market changes.
This option gives homeowners maximum flexibility without the upfront costs associated with a refinance & without the need to pay interest until they draw on the line.
Hybrid Equity Loans
Some banks offer hybrid equity products where a portion of the balance is treated as a home equity loan & there is an additional cap which can be used to withdraw further equity on a credit line.
All mortgages come with loan origination & closing costs. If a loan is marketed as having "no closing costs" then the associated costs are typically rolled into the interest rate charged on the loan. For instance, a person might get a 4.5% 30-year mortgage with $3,000 in closing costs, or a "no cost" home loan with the interest rate set at 4.75%.
Typical fees are highlighted in the following table.
On average you can expect fees to run around $2,500 to $3,800 based on the value of the home & which loan options you chose.
Lowering the interest rate on a home can save a homeowner money over the long run, but it can take years to offset the initial closing costs on the loan. The following table can help homeowners work through if refinancing is right for them.
The above example presumes the following:
Banks typically limit borrowers to a maximum loan-to-value of around 80% to 85%. Most who try to borrow above this level are typically denied & if they are approved they are required to pay higher rates of interest to compensate the lender for the elevated risk.
Homeowners who financed their homes through a government sponsored loan program have the following limits:
Beyond a loan's break even point, homeowners should also consider their situation when debating if a refinance makes sense.
A software company named Ellie Mae powers the loan application process for many lenders. Here are their average side-by-side average credit score, loan-to-value & debt to income ratio statistics for closed purchases and refinances from the June 2018 version of the Origination Insights Report.
About Our Site
Our website uses Clicky analytics service to measure web traffic. We do not carry any advertisements, directly collect any personally identifiable information, nor share data with any other third parties beyond our web analytics measurement service. User data is further protected by using a secured connection. Do you have questions about our site or feedback to improve it? Please email us at
© 2019 RefinanceCalculator.org — All Rights Reserved