It’s important to ask yourself this up front—because the reasons to refinance come in several different forms. With a home loan refinance, you could:

Consolidate debt – such as high-interest credit card debt

Get cash out for major expenses – such as home improvements or college tuition

Shorten your loan term – such as refinancing from a 30-year to a 15-year fixed

Lower your monthly payment – such as refinancing to a lower rate

Home equity is fundamental to refinancing – it’s the difference between the property’s current value and the amount you still owe on the loan.

Private Mortgage Insurance (PMI)

When it comes down to it, “enough home equity” means a few different things. If you have a conventional loan, you’ll need to have at least 20% equity built up to qualify without having to pay private mortgage insurance (PMI). However, if you have an FHA loan, you you’ll need to have a minimum of 2.25% equity.

Keep in mind: For some homeowners, adding PMI to their refinanced loan could nullify the benefits of a refi. For others, refinancing can actually eliminate PMI.

Your credit score is just as important to qualify for a refi AND get a good rate as it was when you first bought your home. But it all depends on the loan. Consider this breakdown:

FHA loan: Typically, you’ll need a minimum score of a 580, with more favorable terms for those with 600 or above. It’s also dependent on the type of FHA refinance.

VA Loan: The VA does not require a minimum credit score for a refi, though many, if not most, VA lenders look for a score of 620 or greater.

Conventional Loan: Many lenders will accept a minimum score of 620 to 680. But that’s just to qualify. The best rates are usually given to scores of 740 and above.

Your closing costs are dependent on several factors, including the purchase price of the home and the loan you’re refinancing. Generally, you can expect to pay between 2% - 5% of the loan amount. Therefore, if your refinanced loan is $150,000, your closing costs would be between $3,000 and $7,500.

It’s crucial to determine how many months or years it will take until the benefits of your refi outweigh the costs. To calculate the break-even point for your closing costs, divide the refinancing costs by the amount you’ve lowered your monthly payment.

For example: If the refinance will reduce your monthly payment by $175, but the closing costs end up being $3,500, it will take you 20 months to break even. So, if you’re thinking about moving in a couple of years, it might not make financial sense for you to refi.

If you have a home equity loan or line of credit, the outstanding balance will be deducted from your equity.