Refinance Calculator: Will Refinancing Your Mortgage Save You Money?
Refinancing your mortgage can help you save money and manage your monthly payments more easily if you make it your goal to understand when the transaction works in your favor.
There are many reasons to refinance. Whether refinancing makes sense for you depends on the goal you’re trying to achieve.
A refinance calculator can help you crunch the numbers. It’s up to you to know whether those results work to your benefit or not.
But it’s often not a straightforward, yes-or-no answer. This calculator is designed to help you decide if you should refinance your home loan.
Refinance Calculator Instructions
It’s not complicated to find out if a home loan refinance makes sense for you. You only need a few numbers to plug into our calculator to see if this is a prudent financial move.
Step 1: Input Your Current and New Loan Origination Dates
If you’re unsure when your current mortgage loan originated, you can typically find that information in your original loan docs or through your lender.
Step 2: Input Your Current and New Loan Amounts
Your loan servicer can also provide you with your original loan amount. You may also find it on a recent mortgage statement. If you’re not sure of your new loan amount, you can guestimate.
Step 3: Input Your Current and New Loan Terms
Will you be refinancing your home for 15 or 30 years? Most mortgages are 15 or 30 years, and there are advantages to both. Your house will be paid off sooner if you choose 15 years, but your payments will be lower if you choose 30 years.
Step 4: Input Your Current and New Interest Rate
You can get your current interest rate from your loan docs or through your lender or servicer. If you’re not sure yet what your new loan rate will be, you can quickly search to see the average interest rate and plug that number in.
Step 5: Enter Your Estimated Closing Costs
Closing costs will run you anywhere from 2% to 6% for a refinance.
Step 6: Click Calculate
You’ll be able to see an estimate of your current monthly payment compared to your new payment, the amount of money you’ll save per month on your payment, and how long it will take you to recoup the money you spent on closing costs by lowering your payment. You’ll also receive your bottom-line number: the amount of money you’ll save over the life of your loan.
Which Lenders Have the Best Personal Loan Rates?
If a home refinance doesn’t work in your favor but you still need cash, a personal loan might be the answer. Finding the right lender could help you save hundreds or even thousands of dollars. Compare offers from competing lenders.
Is It Worth It to Refinance?
A mortgage calculator can help you see whether the opportunity to refinance can help you meet your goals. Those goals depend on your reasons for refinancing, as explained in the examples below.
When Interest Rates Drop
Mortgage rates go up and down over time. If they have dropped since you first took out your mortgage, you may have an opportunity to save money by refinancing.
Desired result: Lower payments, the potential to reduce total interest expense
Lowering your interest rate should lower the interest component of your monthly payments, potentially lowering your monthly payments and reducing the total interest expense you pay over the life of your mortgage.
Must meet this condition: New mortgage has roughly the same term
However, refinancing at a lower interest rate is most likely to accomplish both these goals only if your new mortgage is roughly the same length as the remainder of your existing mortgage.
What to know
If you shorten the remaining mortgage term, it could result in higher monthly payments. If you lengthen the term of the mortgage, it could raise your total interest expense over the life of the mortgage.
Note that in most cases, if you refinance your current 30-year mortgage with a new 30-year mortgage, it effectively lengthens the term of your mortgage. That’s because presumably you’ve already paid down some of that mortgage so it would have less than 30 years to go.
In that case, refinancing to a fresh 30-year mortgage effectively restarts the clock. This means more years of paying interest, which could raise your total interest expense.
What to look out for
Another thing to watch out for when refinancing to lower your interest rate is the closing costs of the new loan. You have to make sure your interest savings are more than enough to cover those closing costs.
How to evaluate
To make sure refinancing is worth it, compare your total interest savings with the closing costs when using the refinance calculator.
You should also consider the break-even point. This is the time it will take for your interest savings to recoup your closing costs. The longer that takes, the less attractive refinancing is.
Ideally, you should see three things to fully benefit from refinancing at lower interest rates:
- Total interest savings which exceed your closing costs.
- Monthly payments that are lower than your current payments.
- A break-even point within a few years.
When You are Within 20 Years of Paying Off a 30-Year Mortgage
When you’ve paid your mortgage for a decade or more, you’ve covered all your closing costs and have put some serious equity into your home.
Desired Result: Potential to reduce total interest expense even if refinance rate isn’t lower
If you’ve been paying your mortgage down for ten years or more, you might be able to lower your interest rate even if mortgage rates generally haven’t fallen.
That’s because shorter-term mortgages usually have lower rates than longer-term mortgages.
Must meet this condition: New mortgage must be a shorter term than original loan
So, if you are ten years into a 30-year mortgage, you might benefit by refinancing to a 20-year mortgage. If you are 15 years into paying off your 30-year mortgage, you might consider refinancing to a 15-year mortgage.
How to evaluate
To see if this works in your favor, evaluate the results of a refinance calculator according to the guidelines described in the above section on refinancing to lower your interest rate.
If You Can Afford Higher Monthly Payments
This situation illustrates how different approaches to refinancing can yield a desirable result, even in ways you might not expect.
Desired result: Potential to reduce total interest expense by making larger payments
Perhaps you have a new job or got a raise, and your income has gone up.
If your financial position has improved since you first took out your mortgage, you might benefit in the long run by shortening the term of your mortgage.
This is likely to raise your monthly payments but could have two long-term benefits:
- Paying your mortgage off over a shorter period of time should mean fewer interest payments.
- Also, refinancing to a shorter mortgage may allow you to get a lower interest rate.
Must meet this condition: Mortgage must be a shorter term than the original loan, with the same interest or less
Clearly, refinancing is not the only way to reduce your total interest expense if you can afford higher monthly payments. You could simply pay down the principal and effectively accomplish the same thing without the additional expense of closing costs.
How to evaluate
When considering this approach, look for the following in your refinance calculator results:
- Total interest savings over the life of the mortgage exceed closing costs on the new loan.
- A break-even period of only a few years before you recoup closing costs.
- Monthly payments that you can comfortably fit into your budget.
If You’re Struggling to Make Payments
If you’re having trouble meeting your monthly mortgage payments and it’s putting your house at risk, you should see how refinancing might help.
Desired result: Lower payments
The ideal situation is to lower those payments by refinancing at a lower interest rate. However, this depends on market conditions, so this option is not always available.
Still, you might also refinance to lengthen your remaining repayment period. Stretching those payments over a longer time should lower your monthly payments.
What to know
The rub is that this is also likely to increase your total interest expense over the life of the mortgage. However, that may be a price you are willing to pay to avoid losing your home.
How to evaluate
If lowering the monthly payments is your goal, look for the following results from your refinancing calculations:
- Confirm that your new monthly payments will be readily affordable.
- Look at the increase in total interest expense plus the closing costs to see how much this strategy will cost you in the long run.
If Your Credit Score Has Improved
This is a fairly common scenario. Often when people first buy a house, they are early in their careers and have established only a limited credit history.
Later on, a higher income and stronger credit history might qualify you for better loan terms.
This may allow you to lower your interest rate even if mortgage rates generally haven’t dropped.
If You Have Student Loan Debt, Credit Card Debt, or Other Debt You Want to Retire
Mortgage debt is one of the cheapest ways to borrow money. Thus, if you have other forms of debt and have built up some equity in your home, a cash-out refinance might make debt more affordable.
Desired result: Reduce overall interest expense on all debt
The way this works is that you refinance to a mortgage in a greater amount than the remainder of what you owe on your current loan. The difference can be used to pay off those other debts.
How to evaluate
To see if this is worthwhile, focus on the results from your refinance calculator:
- Obtain the total cost over the life of the new loan, including closing costs. Now compare this to what it would take to pay off your current mortgage and other debts.
- Monthly payments. Shifting more debt into your mortgage puts your house on the line, so you should be very sure you would be able to meet the payment obligations of the new loan.
If You Are Considering a Home Renovation Project
If your home needs fixing up or repairs, taking some equity out to do this can be a smart move.
Desired result: Finance remodeling at a lower interest rate
If you have equity in your home, a home equity loan or a HELOC can be a cost-effective way to finance remodeling projects. However, cash-out refinancing may be even cheaper.
What to know
Refinancing to a larger mortgage and using some of the cash for your remodeling project may be cheaper than a home equity loan or HELOC because it is a primary mortgage. These generally offer lower rates than secondary mortgages.
This approach is especially attractive if you can refinance at a lower rate than your existing mortgage.
How to evaluate
To evaluate this option, you should:
- Calculate the total cost of a cash-out refinance over the life of the loan, including closing costs.
- Compare this to what it would cost to pay off both your existing mortgage and a home equity loan or HELOC for your remodeling project (including the closing costs on that new borrowing).
As the above examples show, refinancing can be applied to a number of situations. Experiment with a refinance calculator to make sure it will accomplish what you intend it to do.
Refinancing as Part of a Long-Term Plan
Mortgages are typically long-term debt obligations, so refinancing should be part of a long-range financial plan.
A financial advisor may be able to help you create that kind of long-range plan. That plan can help put your refinancing opportunity in context and see whether refinancing will help you meet future financial goals or could possibly interfere with them.
After all, your house may always be your single most valuable possession. It makes sense for the financing of that possession to be a centerpiece of your long-term financial plan.
