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With mortgage interest rates near historic lows, many homeowners are looking at potential benefits to refinancing. This mortgage refinance calculator can help you compare what a refinanced mortgage payment might look like with your current mortgage payment — as well as calculate how much you’ll save or lose by refinancing your home.
How We Calculate Your Refinance Savings
To use the mortgage refinance calculator, plug in your current monthly payment, loan balance, property value, and the number of years remaining on your existing mortgage. Then, choose a refinance term and a new interest rate. Our calculator will automatically display your new monthly payment and how much you’re saving or overpaying each month.
If you greatly increase your loan term you could end up paying more interest in the long term because you’re borrowing the money for a longer period of time. On the other hand, if you increase your monthly payments with a shorter-term loan, you would pay off your mortgage sooner and save on interest over the life of the loan. With this calculator, you’ll also be able to instantly see if the new mortgage will save or cost you money in the long run.
What Is Mortgage Refinancing?
Refinancing a mortgage is essentially replacing your current home loan with a new loan.
Refinancing is similar to any other loan in that you must apply, and the process involves a deep dive into your credit, income, employment history, and finances. Most people refinance when they have equity in their home — the difference between the worth of the home and the amount owed to the lender.
When you refinance, the original loan is paid off with money borrowed from the new loan. Refinancing a mortgage commonly lowers your interest rate and monthly payment, giving you more liquid cash month to month. You can also refinance into a shorter-term loan, which can help you save on interest and own your home outright sooner.
You have two basic options when refinancing: a rate-and-term refinance or a cash-out refinance. A rate-and-term refinance alters the interest rate or term — sometimes both — of an existing mortgage, and equity isn’t taken from the home. With a cash-out refinance, you’re getting a new loan that’s worth more than you owe and pulling out equity built up in the home. The difference is paid to you in cash.
How Much Does it Cost to Refinance a Mortgage?
When you refinance your mortgage, you won’t have to make a large down payment — but you’ll still have to pay closing costs. Refinance closing costs are usually 2% to 5% of the new loan balance, so you’re potentially looking at thousands of dollars in fees. What you pay will vary, so it’s important to shop around for the best mortgage lender for your refinance loan.
The specific fees you pay differ depending on a handful of factors, like where your home is located or the type of refinance you’re getting, but can include:
- Loan origination fees
- Appraisal fee
- Attorney fees
- Title fees
- Discount points
- Escrow fees
- Inspection fees
- Survey fee
- Application fee
- Credit check fee
Depending on how much equity you have in your home, you may be able to add some, or all, of your refinance closing costs onto your new loan. This is often referred to as a no-closing-cost refinance, although that’s a bit of a misnomer. You’re still responsible for the fees, you’re just not paying them upfront and are paying them over the life of the loan instead. Although some lenders may give you credits to cover closing costs in exchange for a higher interest rate. So you’re paying for it in one way or another.
How to Calculate the Break-Even Point of a Refinance
The break-even point of a mortgage refinance is when the money you save is equal to what you paid in upfront closing costs. So before you pay thousands of dollars to refinance, you should do the math first.
Let’s say it will cost $6,000 to refinance, but your lower mortgage payment will save you $250 a month. To figure out how many months it will be until you break even, you divide the refinance cost, $6,000, by your monthly savings, $250. In this scenario you would break even in 24 months — or two years.
What Are the Most Common Reasons to Refinance?
Knowing when to refinance is an important decision. There are a lot of reasons to refinance your existing mortgage, including:
Lowering your monthly mortgage payment with a longer-term loan: When you extend your loan’s repayment term, your monthly payment will decrease. The downside is that not only are you adding years onto your mortgage, but you’re likely to be on the hook for more interest over the life of the loan.
Reducing the interest rate on your mortgage: Rates are low right now, and if you can reduce your interest rate the savings may outweigh the upfront costs of refinancing.
Switching from an adjustable rate to a fixed rate: If you have an adjustable-rate loan that’s about to have a rate increase, you may be able to save money by locking in your rate with a fixed-rate mortgage.
Paying off your mortgage sooner with a shorter loan term: A loan with a shorter repayment period will save you on interest, but you’re likely to be responsible for a bigger payment each month.
Eliminating mortgage insurance on an FHA mortgage: Regardless of your down payment size, FHA loans require mortgage insurance. One way to get rid of it is to refinance to a conventional loan once you have 20% equity in the property.
Cashing out your home’s equity: With mortgage rates as low as they are, a cash-out refinance can be an affordable option for making upgrades to your home or consolidating high-interest debt.How long you plan to stay in your home plays a big part in determining whether it makes sense to refinance. If you move out of a home soon after you’ve refinanced your mortgage, it’s not likely that you’ll have saved enough to recoup the upfront costs.
When You Should Not Refinance
You always want to make sure you’re refinancing for the right reasons. Refinancing can save you in the long run but it comes with some substantial up-front costs. So it’s important to make sure refinancing will substantially benefit your finances and that you’ll live in the home long enough to recover the costs. As a general rule of thumb, it’s not a good idea to refinance for short-term gains.
Next Steps to Refinancing a Mortgage
If you’ve determined it’s the right time to refinance, it’s time to look around for the best offer. Start by figuring out what type of refinance loan you need to help narrow down your options. Then look at a few different types of lenders, like a bank, credit union, or mortgage broker.
To accurately compare the rates and fees, you’ll need to submit an application to get a Loan Estimate from the lender. The Loan Estimate is a standardized form that allows you to easily analyze the offers.