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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 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.
When to Refinance
Knowing when to refinance is just as important as the decision to do it in the first place. There are a lot of reasons to refinance your existing mortgage, including:
- Lowering your monthly mortgage payment with a longer-term loan
- Reducing the interest rate on your mortgage
- Switching from an adjustable rate to a fixed rate
- Paying off your mortgage sooner with a shorter loan term
- Eliminating PMI on an FHA mortgage
- Cashing out your home’s equity
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. Having an idea of when you’ll break even with refinancing costs will help you plan your timing.
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.
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.