If you’ve ever wondered how much mortgage refinance can I afford, you’ve come to the right place as I’ll walk you through the easy math in this blog post. Mortgage refinancing is a process that replaces an existing mortgage loan with a new mortgage. Homeowners consider refinancing for a number of reasons, including pulling out cash from their home equity to locking in a better interest rate (because a lower interest rate reduces the overall cost of the loan). Your bank or lender will check your income, employment history, finances, and credit health during the refinance application process.
Banks will also conduct a home appraisal to determine the current market value of the home and the amount of home equity you possess. Check online for a refinance calculator to help you figure out how much mortgage refinance you can afford.
To know how much mortgage refinance you can afford, you’ll need to conduct research into your current loan balance and how it compares to the equity in your home, as well as current interest rates and your credit score.
How to calculate how much refinance I can afford
Calculating how much mortgage refinance you can afford means performing a similar calculation as you might have when you first applied for the mortgage. Your lender will use variables like the current monthly payment, the balance remaining on the mortgage, the current interest rate, and the remaining loan term.
Other financials required by the lender include the new loan term and new interest rate. After entering these figures into an online calculator, it should inform you of the new monthly payment schedule and the number of months required to recoup the costs associated with refinancing the mortgage.
If your goal in refinancing your mortgage is to take equity (money) out of your home and use it for another purpose, you’ll need to use a cash-out refinance calculator. This type of refinance calculator will help you figure out how much money you can get out of a refi, as well as whether your income and debt to income ratio are sufficient for a new loan.
How much monthly income do I need to refinance my mortgage?
The amount of income you need to refinance a mortgage depends on how much debt you have and how it compares to your monthly income. The banks look at your debt to income ratio (DTI), which is how much debt you’ve taken on vs how much income you earn. Generally, the highest DTI ratio you can have for a new loan is 43 percent.
For many homeowners, their current debts are different than they were when they bought their house and started paying a mortgage. The family may have applied for new credit cards, personal loans, or car loans, which increased their monthly payments and their debt to income ratio. Let’s create an example:
Imagine a homeowner who has a monthly mortgage payment of $1,100, a car loan of $200, and credit cards of $300. Their total monthly debt is $1,600. Meanwhile, they have a job that pays them $5,000 per month before taxes. To calculate their DTI, take their debt and divide it by their income.
$1,600 divided by $5,000 is 0.32 (or 32%).
The homeowner has a debt-to-income ratio of 32 percent. That’s well below the limit of 43 percent for mortgage approval. Therefore, this homeowner could take equity out of their home with a new larger mortgage.
How much more could they pay a month? To remain at or below the 43 percent DTI threshold, the homeowner could increase their monthly mortgage payment by $500 and remain within the 43 percent guidelines.
If all these numbers seem complicated, don’t worry. Online calculators allow you to modify both the monthly payment and the interest rate, which can help you figure out how much equity you can pull out of your house based on your current income.
The main thing to remember is that your income isn’t always the most important factor in eligibility. Rather, it’s your income as it relates to your current debts.
How do you determine if a refinance is worth it?
For many homeowners, figuring out whether a refinanced loan is worth it means running the numbers and determining whether the new mortgage will save or cost more in the long run. However, saving money isn’t the only reason to consider a home refinance.
For some homeowners who have adjustable-rate mortgage loans (ARM), refinancing might not offer significant savings but will instead allow the homeowner to get a fixed-rate mortgage. A fixed-rate mortgage ensures that the homeowner will never need to worry about a higher monthly payment due to an interest rate change (since their mortgage rate is “fixed”).
Refinancing your mortgage may also be the best way to stay in your home when climbing interest rates have created an untenable situation with unaffordable payments. The new mortgage loan might represent an increase in the overall cost of homeownership, but the lower monthly payments may help the family avoid bankruptcy or foreclosure.
For other homeowners, cash-out refinances help lower monthly bills by allowing the family to pay off high-interest accounts like credit cards with money from a lower interest mortgage loan.
A cash-out refinance is worth it when it helps a homeowner accomplish their goals, whether it’s a lower mortgage payment, an interest rate reduction, or the opportunity to consolidate debt with a cash-out refinance.
What credit score do you need to refinance?
The credit score most often cited as the minimum for a mortgage refinance is 620, but not all lenders use the same score. Additionally, some lenders don’t even use the same credit reporting agencies when checking credit for loan eligibility. Therefore, a homeowner who wants to refinance might want to check with their preferred lenders for information on refinance eligibility.
Further, it may help to apply with an improved credit score because lenders often reserve the lowest interest rates for applicants with high credit scores. A 620 might get your foot in the door, but you may want to investigate increasing your score to get an interest rate reduction.
How long does a mortgage refinance take?
The timeline for a mortgage refinance is similar to applying for an initial mortgage loan. Applicants can expect the process to take anywhere from 30 to 45 days; however, there’s no rule that says the process must take that long. And the good news is that this number is coming down as the tech improves around mortgages.
The bank or lender must complete a full investigation into the applicant’s finances, as well as secure an appraisal, which can take time to complete.
What is the difference between a cash-out refinance and a refinance?
In both cases, refinancing a mortgage and a cash-out refinance create a new loan. In the case of a refinance, the homeowner will get a new loan that’s similar to the old loan but with a different interest rate. During a cash-out refi, the homeowner will see their current mortgage replaced with a larger mortgage, and they’ll pocket the difference. Knowing the difference will also help you to understand a loan estimate document since you will receive one of these during the refi process.
What is the maximum loan to value for a cash-out refinance?
The max loan to value (LTV) for a conforming loan for Fannie Mae and Freddie Mac in 2022 is 95 percent for a standard refinance. For a cash-out refinance, on the other hand, the maximum loan to value or LTV is 80 percent. That threshold may drop even more for second homes and investment properties.
What is the average cost of a cash-out refinance?
The fees associated with a cash-out refinance usually range between three and five percent. Those fees account for closing costs that may include an appraisal fee and a loan origination fee. Not all lenders charge the same for closing costs, so it’s helpful to explore common refinance fees and compare them to get the best overall rate (this is especially true for bank statement mortgages).
What are the pros & cons of a cash-out refinance?
For many homeowners, refinancing an existing mortgage offers multiple benefits like lower monthly payments, the opportunity to access home equity, or a reduction in the overall cost of the mortgage through a lower interest rate.
However, some homeowners may experience some drawbacks during the process, even if they end up with lower monthly mortgage payments and a lower annual percentage rate. For example, a refinance creates a new loan, and the amortization table starts over. That means the homeowner pays more to interest versus loan principal when they start a new mortgage payment.
For a homeowner who refinances a loan after making payments for several years, that could mean paying more interest on the loan. It’s helpful to investigate the new amortization table in the fine print and the total amount of interest paid to determine how long it will take to break even and start receiving a benefit.
It’s also worth noting that a cash-out refi or regular refinance could trigger the need for a change to the amount paid for homeowners insurance. The total monthly payment could actually increase due to insurance changes. The lender could require a new private mortgage insurance policy.
Knowing how much mortgage refinance you can afford is easy math once you know your homeowner equity
At the end of the day, the refinancing process is complex, and it’s helpful to read the mortgage details carefully with the help of a loan officer. There is no simple answer when it comes to deciding whether to refinance a mortgage or not. You can use a mortgage refinance calculator to perform some simple calculations, but it’s important to investigate all aspects of the process before committing.
