Mortgage Refinance Calculator: Should I refinance now?
If you’re looking to save money on monthly mortgage payments, one solution may be to look into refinancing your current home. While the incentives to refinance may be particularly evident in a low-interest rate environment, you’ll still want to run the numbers through a refinance calculator to ensure it makes sound financial sense.
Table of Contents
- What is refinancing and a refinance calculator?
- What is the cost to refinance?
- How to use our mortgage refinance calculator
- Is it worth refinancing? What is the break-even point?
- How we calculate your refinance savings
- Why you should refinance
- Why you should NOT refinance
- Mortgage refinance vs. purchase
- Mortgage rate differences
- Other mortgage calculators
- Get your refinance rate
One of the many perks afforded to homeowners is the ability to refinance their homes if and when they choose to. But what exactly is refinancing (or “refi” as it’s commonly called) and what’s a good refinance rate? Furthermore, how does a refinance calculator fit into all this?
Refinancing a property is typically driven by either saving money or adjusting the terms of your loan. It’s a method of obtaining a new mortgage so you can take advantage of lower prevailing interest rates in the marketplace. This is accomplished by applying for a new loan with the intention of seeking a more favorable credit agreement between yourself and the lender.
Just like your original mortgage, there’s a whole loan approval process you must submit to. Once approved, you can then swap out the old contract—the terms of your original mortgage—for a new agreement. This is your refinanced loan.
The results? By seizing upon favorable interest rates and obtaining a new mortgage, you may be able to reap financial and other benefits, including potentially one or more of the following:
- Lower your monthly mortgage payments
- Adjust (shorten) the term of your loan
- Pay less interest over the life of your loan
- Potentially eliminate mortgage insurance premiums
- Swap an adjustable rate mortgage loan (ARM) for a fixed-rate loan
- Withdraw cash from your home as part of a cash-out refinance and use the money for home improvements, college tuition payments or whatever else you need extra cash for. It can also used for convenient debt consolidation***
A refinance calculator is simply a tool to help guide you in your decision on whether to seek a refi or not. It allows you to input the terms and costs of the original loan as well as those of what your refinanced loan. It calculates your savings on a monthly basis as well as those at a predetermined time in the future when you might want to sell.
Even in the most attractive low-interest rate conditions, a home loan refinance will cost you money. If you recently purchased your home, you’ll no doubt see a list of charges that look all-too familiar. Usually, these expenses will either be paid upfront to your lender or rolled into your new mortgage as part of your new APR.
Typical costs of a refinance include:
- Application and underwriter fees
- Title insurance fees
- Credit check fees
- Appraisal fees
- Additional (state and local) taxes
- Closing costs
While a favorable interest rate environment is often the catalyst to seek a refinance, lower rates by themselves do not generally justify a refi. As a borrower, you always have to compare the new monthly payments vs. the old monthly payments and then add in the associated costs that need to be paid out during the prescribed period of time you expect to live in your home. The home refinance calculator makes this comparison easy.
As of 2020, the average cost to refinance a home in the U.S was estimated to be $4,345. Naturally, the region, lender and amount borrowed have a pronounced effect on this number.
A home refi calculator should be clear, logical, easy to use and provide quick, actionable results. Let’s take a moment to walk through our tool to determine what kind of information you should be prepared to enter.
Key refi factors fall into four (4) main categories
To effectively use the refinance mortgage rates calculator, you will need to be prepared to input new rates as well as previous information from your initial mortgage. Once you fill in all fields (or add a zero where applicable), simply press the submit bar and see your results.
There are four categories of information that the refi calculator requires in order to create meaningful results:
- Information regarding your original loan
- Information regarding your new refinance loan
- Information regarding yourself, the individual homeowner
Information regarding your original loan:
- Original loan amount
- Original term (in years, typically 15 or 30)
- Years already paid
- Balloon year (if applicable)
- Interest rate: The fixed rate used for your original home loan
These categories are pretty self-explanatory. One note: A balloon payment is an oversized final payment that’s due at the end of certain mortgage loans. This occurs when the entire amount of the loan is not amortized over the loan’s life. When using the refi calculator, leave this as 0 if not a part of your current mortgage.
Information regarding your new refinance loan:
- Term (in years, typically 15 or 30)
- Balloon year (if applicable)
- Origination charge: The sum of all fees relation to loan origination)
- Charge for specific interest rate: Lenders allow borrowers to secure a better interest rate at an additional charge. Expressed as a percentage of the loan amount.
- Other settlement services: Additional fees as described above
- Interest rate: A hugely important factor when it comes to refinancing your mortgage
Information regarding your property:
- Estimated value (see below)
- Yearly property tax: Tax assessed by the local government based on the value of the property
- Yearly property insurance: The yearly cost of insurance to protect your home from potential liability
Note: You’ll need to get your home appraised to determine its current market value. Appraisers will generally use the sales data of comparable recently sold homes as well as the cost to replace the home in the current market.
Information regarding yourself (the individual homeowner):
- Your savings rate: How much of your annual income do you save
- Your state + federal tax rate
- Years before you sell (see below)
Figuring out how long it will be before you decide to sell your home is an important factor in determining potential savings. If you don’t have a hard figure in mind, try to estimate as best as possible. To determine a useful break-even point, it’s important that your refi calculator has a field for this information.
Having inputted all the necessary information into the refi calculator and seen the results, you now have to make sense of everything. It’s time to ask that all-important question: Is it really worth refinancing?
It’s not always a cut and dry answer. Depending on certain choices you decide to make, the cost/benefit analysis could change.
Let’s start with the industry standard for determining refi benefits: the break-even point.
The break-even point is the point in time when you recoup the costs you had to pay to obtain the refinance. It’s typically a couple years down the road, but if it’s too many years into the future, then you may not make your money back before you decide to sell your home or pay off your loan.
Refinances tend to make more sense if you’re planning to stay in your home for a while. The shorter the time you live in your home after refinancing, the less opportunity you have to pay off the associated costs rolled into your monthly payments and produce the intended savings.
Calculate a break-even point using your refi calculator
- Monthly savings: $114
- Total closing and associated costs: $3,000
- Your break even point = 26 months
You simply divide the costs required to refinance ($3,000) by the monthly savings ($114). A written formula appears like the following:
- Closing costs / Decrease in monthly payments = Number of months to break even
In this example, it would take a little over 26 months to break even. After that, you get to keep the entire $114 as your refinance savings.
Once the required information is entered into the refinance calculator, you’re automatically taken to the results page. Here, you will be presented with a side-by-side comparison of monthly payments between your current mortgage and what you could receive with a refinance.
Additionally, there is a sentence at the top that states:
Refinancing will save you, in today's dollars, $_____ over the next __ years.*
The decision to refinance is a serious one and not all borrowers are ideal candidates for a refi. However, for those individuals who can lock in attractive rates and restructure the terms of the loan, there can be considerable financial advantages. While there are a number of factors to consider, results are most actionable when borrowers determine ahead of time how long they plan to stay in their home.
If the goal is to live in your home for the foreseeable future, you’re probably a good candidate for a refinance, provided you can obtain a favorable interest rate. As stated above, it can take a few years to fully recoup your savings.
Example 1: The refi calculator tells you it’s worth it**
John has an existing 30-year mortgage for $300,000 at 4% interest rate and a total monthly payment of $2,487. He’s currently in his 5th year of a 30-year mortgage and isn’t planning to move. Annually, he pays $6,300 in property taxes and another $2,000 in homeowner’s insurance.
Due to market conditions, John is able to lock in a new agreement at 3.50% while keeping his 30-year mortgage. Lastly, his total fees/charges for the privilege of a refi are $6,000. Two things are happening that make John a good refinance candidate:
- Monthly interest payments have been immediately reduced from $2,487 to $2,171. That’s a difference of $316. A clear savings. In fact, over the next 10 years, John will be able to save an estimated $12,295.
- His break-even point is just under 19 months. Despite having to pay $6,000 in closing and associated costs, John will be well on his way to savings within his first two years of refinancing.
Example 2: Why you should refinance: Changing terms**
Shortening the term of your loan is another key reason why many borrowers seek a refi. Originally, a 30-year loan might have made sense for John, especially considering the lower monthly payments that were part of the agreement. However, John is now in the prime of his career, earning more money and able to afford the higher monthly payments that come with a 15-year fixed mortgage.
His reasons for switching to a 15-year mortgage are pretty simple and are born out in the refinance calculator. John can:
- Pay off the loan more (reduce future interest payments quickly)
- Reduce amortization
- Lock-in a lower interest rate
These are all great long-term money-saving reasons for choosing to get a refinance.
Despite the allure of reduced rates and the freedom that comes with restructuring your initial loan agreement, there are certain scenarios where choosing to refinance may not be the optimal decision. You have to weigh the savings generated from a reduced interest rate vs the costs of refinancing, including the costs of purchasing discount points, if applicable.
The other key factor to think about is time, as in how long do you expect to be living in your house before you decide to sell?
Example: The refi calculator tells you it’s not worth refinancing**
Like John, let’s assume Cindy is thinking about a 30-year refinance at 3.50%. She too has lived in her property for 5 years, has $6,000 in associated costs, $6,300 in property taxes and $2,000 in annual homeowners insurance.
The difference: Cindy is paying for discount points that lower her interest rate by 0.50%. This costs her $6,000 over the life of the loan. One more critical factor: Cindy wants to move in two years.
Using the mortgage calculator, we see that although the lower rate reduces the monthly interest payment to $2,487 from $2,171, her associated costs mean that Cindy will actually be paying $5,455 more over the next two years—not enough time to recoup any savings.
Because Cindy is paying for discount points and is also selling her house relatively soon, a refinance does not make financial sense for her.
Although they are both home loans, there are crucial distinctions between obtaining an initial mortgage and getting a mortgage refinance. There are also several similarities. Let’s run through them first.
Similarities between a refinance and a home purchase
In both instances, you will typically work with a loan officer representing either a bank or a mortgage company. As part of the loan application process, you will need to undergo a credit check and have your credit score scrutinized, furnish bank statements, provide other income verification and have your DTI (debt-to-income) analyzed to make sure it’s acceptable to the lender.
Differences between a finance and a home purchase
First, the obvious: A home purchase is the initial acquisition of a home; a mortgage refinance is the restructuring and replacing of that original loan agreement to explore new terms and/or new interest rates.
Besides wanting to obtain lower interest rates, homeowners typically seek a refinance for these reasons:
- Pay off mortgage faster
- Reduce overall interest rates over the life of your loan
- Reduce monthly mortgage payments
- Switch from an adjustable rate mortgage (ARM) to a fixed rate
- Free up home equity (known as a cash-out refinance)
At times, borrowers will find that the advertised rates offered to borrowers are not the same for a refinance as they are for home purchase. There are several reasons for this. Most of it is based on perceived risk to the lender.
A cash-out refinance is a type of refinance where you remove cash from your loan to use for other purposes. This is done by tapping into existing home equity. The refinance calculator is a valuable tool to consult when considering this option. Borrowers choose a cash-out refinance for a few different reasons.
Sometimes borrowers choose this option so they are able to take money out for the purposes of home remodeling, which can add important value to the house over time. In other instances, a cash-out refinance is chosen so borrowers can consolidate different debts like credit cards and college tuition, and roll them into one easy-to-remember mortgage payment.
Of course, accessing this liquidity comes at a price. In effect, a cash-out refinance increases your outstanding loan balance and LTV (loan-to-value ratio) while reducing home equity. In the eyes of the lender, the loan becomes riskier and therefore, a higher mortgage rate is passed on to the customer.
Rate and term refinance
A rate and term refinance is when you’re either adjusting the mortgage rate and/or the terms of the loan. This is the typical refinance most homeowners are familiar with and its effect on rates varies from lender to lender. Sometimes, it may be slightly higher than the interest rates charged for purchases. This is primarily due to the fact that individuals obtaining home loans for purchases defaulted at the lowest rate. Once again, the key element is risk and even refinances pose a slightly higher risk for default than standard home purchases.
Do you have an existing FHA-insured loan? If so, you may want to select a streamline refinance, which allows you to simplify things when it comes to documentation and underwriting. This type of refinance generally allows you to access lower rates and reduce your monthly payment. But not all FHA mortgage holders are eligible. Check with HUD for a full list of streamline refinance requirements.
In an ongoing effort to inform, educate and enlighten, Guaranteed Rate offers homebuyers an array of mortgage-related calculators to help them seek answers as they try to figure out financing. To gain additional insight, use these tools in concert with your own due diligence and the trusted advice from your loan officer.
- Mortgage calculator: An invaluable planning tool designed to provide you with a loan estimate before choosing a home loan. Note: it’s important to input accurate interest rates into this tool in order to be effective.
- Home affordability calculator: Rather than merely asking out loud, “What can I afford?” use the Guaranteed Rate home affordability calculator to determine the purchase price, down payment and monthly payment you’re comfortable paying.
- Closing cost calculator: Closing costs can sneak up on a borrower. Use this tool to better estimate closing costs and associated charges that you will be expected to pay when buying a home or conducting a refinance.
- Fixed rate mortgage calculator: Homebuyers often seek additional clarity when choosing between a loan with lower monthly payments over a longer period of time and a loan with higher monthly payments but a shorter loan duration and a lower interest rate. This tool allows you to compare the pros and cons of both 15- and 30-year fixed rate mortgage loans.
- Rent or buy calculator: If you’re vexed by the question of “Should I buy now or should I rent?” then this calculator is for you. It helps you draw clear financial conclusions that enable you to decide between these two options.
- Extra payments calculator: The allure of extra payments is that you can pay off your home loan more quickly. However, these types of payments—either recurring or lump sum— don’t always have the intended effect. This tool provides insight into extra payments and whether or not the increased financial burden will enable you to save money and pay off your home loan faster.
- Mortgage points calculator: Those looking to buy a home or refinance are often held captive by the current interest rate environment, which can be high or low depending on broader economic factors. One way to take things into your own hands is to purchase discount points; in essence, pay a fee directly to the lender at closing in order to secure a more favorable interest rate. This calculator lets you know whether purchasing points are worth the added cost.
Purchasing a home is always a big deal; refinancing may seem easier, but it’s also a significant investment of time and money. Leveraging digital tools like a mortgage refinance calculator can help optimize the decision-making process when it comes to refinancing your current home.
While low-interest-rate environments provide attractive incentives for homeowners to consider a refinance, only by mapping out long-term goals and actually running the numbers will you be in a position to decide what’s in your best financial interest.
- *Savings, if any, will vary based on consumer credit profile, interest rate availability, and a variety of factors.
- **Sample scenarios provided for educational purposes only and are not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate, Inc. cannot predict where rates will be in the future.
- ***If a cash-out refinance is chosen for debt consolidation, it can increase the time it takes to pay off the additional amount due to the fact it's lumped in with the borrower’s mortgage and paid off over the term of the loan.