Refinance Calculator 2023

How does the mortgage refinance calculator work?

Our refinance calculator helps you determine the monthly savings that you will have by refinancing your home loan at a lower mortgage refinance rate. The total monthly savings are divided into two parts, first, the cash savings from the lower monthly mortgage payment and second, the interest savings. Cash savings are calculated by taking the difference between your original monthly amortized payment and your refinanced monthly payment. Interest savings are calculated by determining the difference between the interest that would have been paid during the original mortgage and the refinanced mortgage.

How is the total savings graph connected to the mortgage refinance calculator?

The total savings from refinancing your mortgage stems from the lower monthly mortgage payments and the interest saved after all closing costs & fees have been deducted. The graphs depicted below the calculator shows you the total savings from the start to the end of the refinance term.

Initially, you will have negative savings because of the closing costs from your refinance. Your savings will quickly increase as you pay less on each new mortgage payment. Following the break-even point, you save funds as you benefit from smaller mortgage payments and interest. Total savings keep rising till the point where your initial mortgage would have ended following which savings begin to decline. For example, if you took a mortgage in 2011 for 30 years, you would be done with your mortgage in the year 2041; however, if you chose to refinance in 2021 for another 30 years, your new mortgage would then end in 2051.

Your savings will fall if your mortgage refinance period is longer than your initial mortgage period because although refinance helps lower monthly mortgage payments, it results in a longer amortization period and hence, more interest payments. Once you pass the point your original mortgage would have ended, every payment for your refinance mortgage would become an “extra” payment. In the example above, your mortgage payments would have originally ended in 2041, but because of the refinance, you will make an additional 10 years of payments to 2051 to cover the refinanced mortgage.

What is the break-even period in mortgage refinancing?

One of the most important factors to consider when taking a mortgage refinance is the break-even period. The break-even period is the number of years it will take you to break even or pay off all the costs associated with refinancing your mortgage. Past this point, you will begin to save money compared to your original mortgage. For example, if you refinance in 2021, and your break-even point is in 4 years, after 2025 all the closing and refinance costs would have been paid and you will start benefiting from the refinance. Therefore, it is essential that if you refinance, you keep your refinanced mortgage for at least the break-even period.

Why is it how long I plan to stay in the home significant?

As discussed above, it is crucial to know if you will be staying in the home for only a few years following the refinance or for the whole refinance period. If you choose to stay in the home only for a few years, there is little to no advantage in refinancing because the lower monthly mortgage payments and interest savings will not pay off the refinance costs in such a short period of time. However, if you know you will stay in that home for a majority of the refinance period, then the refinancing decision could result in savings following the break-even point.

Refinance Closing Costs

Mortgage refinance closing costs are much like the original closing costs you had to pay with your initial mortgage. Each time you borrow money from a lender for both a home purchase and a refinance, you have to pay some closing costs. These costs can vary between lenders and based on your mortgage. Generally, refinancing closing costs will amount to about 2%-6% of your principal mortgage amount. However, closing costs and more specifically refinance closing costs contain a wide variety of individual costs associated with the mortgage. Generally, you can expect to pay a fee for:

• Loan Application
• Home Inspection
• Loan Origination
• Credit Report
• Title Insurance
• Upfront Mortgage Insurance (Only for cash out refinances and if your resulting home equity is less than 20%)
• Legal Services

There are many other fees associated with a mortgage refinance, but you will have already had experience with nearly all of them from your initial mortgage.

When refinancing a mortgage, lenders usually let you include closing costs within the new principal mortgage amount. Lenders will add the total closing costs to your mortgage balance and you will pay it off with interest. This is a good option for homeowners without cash readly available and if you lower your mortgage rate, you should still be able to save money in the long run.

No-Closing Cost Mortgage Refinance

If your lender offers you a mortgage refinance without closing costs , then carefully review what it will cost you in the long term. Lenders only offer this type of refinance in conjunction with an increase to your refinanced interest rate. It's better to pay closing costs up-front than add to your interest rate, which defeats a large purpose of getting a mortgage refinance - the savings.

For example, imagine a borrower wants to refinance a $500,000 mortgage for a 15-year term. They can choose between paying closing costs upfront or a no-closing cost mortgage.

1. Pay upfront: This will allow the borrower to receive a slightly lower interest rate, but they'll have to pay $15,000 upfront. An interest rate of 2.00% would translate to monthly payments of $3,217.54 and a final cost of $594,157.83.
2. No-closing cost: Instead of paying the $15,000 upfront, the borrower can receive a slightly higher interest rate and finance the costs. If the slightly higher interest rate was 2.50%, the monthly payments would increase to $3,433.96. The final price would be $618,113.59 in total.

In the end, the borrower would have to pay $23,955.76 more to avoid up-front closing costs. The increased amount is primarily due to the slightly higher interest rate.

Mortgage Refinancing Alternatives

While a cash-out refinance is one way to borrow against your home equity, additional options are available. While a refinance may provide you with the lowest interest rate, it has the highest upfront fees. Additionally, it has the least flexibility. In most cases, you'll need to wait a few years into your term to avoid paying mortgage-breaking fees. HELOCs and home equity loans all allow you to borrow against your home. This section will compare your alternative options.

Home Equity Line of Credit (HELOC)

A HELOC allows you to borrow and repay the loan, similar to a credit card. It's known as a revolving loan because as you repay the balance, the credit becomes available to you again. A HELOC is the most flexible option because you'll only need to pay interest on the amounts withdrawn. As a result, many homeowners use it as an emergency fund.

You can generally borrow up to 85% of your home equity. The interest rate on a HELOC is variable and is based on an index, such as the prime rate. Your monthly payments are interest-only during the draw period, which is typically 5-10 years. After the draw period ends, you can't withdraw more funds. This commences the repayment period - when you repay the principal and the interest.

Home Equity Loan (Second Mortgage)

A home equity loan is a lump sum loan with a fixed interest rate. You borrow a set amount for a specific period, such as 10 or 15 years, and make equal monthly payments. A home equity loan is also referred to as a second mortgage.

Like a HELOC, you can generally borrow up to 85% of your home equity. The interest rate on a home equity loan is usually fixed. Because you're making fixed monthly payments, home equity loans are easier to budget for than a HELOC.

Refinancing Other Debts

While a mortgage refinance is the most popular debt refinancing method, the same concept can be applied to other debts you may have. For example, your credit card, car loan, and personal loans can all be refinanced to save money. This section will discuss how to refinance these debts and mistakes to avoid.

Refinancing Credit Card Debt

Credit cards tend to have one of the highest interest rates out of any loan. Ranging around 19.99% APR, refinancing to a low interest rate can save you significant amounts. Many credit card companies also offer balance transfer cards. These credit cards offer a promotional low interest period and allow you to transfer the balance from your other credit card.

For example, a balance transfer card may offer a 12-month promotional period with a 1% interest rate. Completing a balance transfer will let you switch from the 19.99% interest rate to 1.00% for 12 months. The catch is that you can't miss a payment. Otherwise, the promotional rate will end. Additionally, the interest rate will likely exceed your initial card at the end of your promotional period. For example, if your rate was 19.99% on the previous card, it could reach 23.99% after the promotion ends. However, balance transfer cards are a great way to pay down debt within the promotional period.

Refinancing Auto Loans

Refinancing may be a great option if you're struggling with high monthly payments or a high interest rate on your auto loan. The typical car loan is around 4% APR, but some can be as high as 10%. Refinancing to a lower interest rate will lower your monthly payment and help you pay down the principal balance of your loan faster. When refinancing your auto loan, pay close attention to the length of your new loan. A longer loan will have lower monthly payments, but you'll end up paying more in interest over the life of the loan.

If you're considering refinancing your auto loan, make sure you have a good credit score to qualify for a lower interest rate. Additionally, your car should be worth more than what you owe on the loan. Most lenders will only finance up to a certain percentage of your car's value, called the loan-to-value ratio. For example, if your vehicle is worth $10,000 and you owe $8,000 on the loan, your loan-to-value ratio is 80%. This means you can finance up to 80% of your car's value.

Refinancing Student Loans

By refinancing, you can get a lower interest rate which will lower your monthly payment and help you pay off your student loans faster. You can also choose to extend the length of your loan, which will lower your monthly payments. However, keep in mind that extending the length of your loan will cause you to pay more in interest over the life of the loan.

When refinancing student loans, compare multiple lenders to get the best interest rate. Your interest rate will be based on your credit score, so make sure you have a good credit score before you apply. Additionally, make sure you compare the loan's total cost before choosing a lender. Some lenders may charge origination fees or prepayment penalties which could increase the cost of your loan.

Frequently Asked Questions (FAQ)

Should I refinance for a period longer than my original mortgage term?

This is an important factor to consider before refinancing and can result in changes to your monthly savings and total interest. Should you refinance for a mortgage term longer than the original mortgage term or should you choose a term that ends when your original mortgage was going to end?

For example, if you have a 30-year mortgage that began in 2016, the original amortization period will end the mortgage in 2046. However, if you choose to refinance in 2021, which is 5 years after you began the mortgage, you can either get another 30-year mortgage which will end the loan in 2051 or you can choose to refinance for 25 years which will end the mortgage in 2046 same as the original mortgage. The table below shows the difference in monthly payments and total interest.

A $500,000 30-year fixed mortgage at 4% in 2016 and refinancing at 3% in 2021 with two different loan term options:

There are pros and cons of choosing either decision and it depends on your financial objectives. If you choose to refinance with a mortgage term that extends beyond the original mortgage date, you will have lower monthly mortgage payments of $1,665 but higher total interest payment of $204,520. With a shorter refinance term, your monthly payment would be higher at $1,873 but your total interest would be lower at $166,940.

Therefore, if you choose to have a longer amortization period, you will save $205 every month but will pay an additional $37,580 in total interest. Similarly, with a shorter amortization you will pay $205 more every month but save $37,580 in total interest.

Should I refinance?

There are several reasons to refinance your mortgage:

1. Lower mortgage refinance rate: If mortgage rates are lower, refinancing could be a good option. A lower refinance rate can lead to lower interest payments and save you money. Our refinance calculator can show you the monthly savings from refinancing at a lower mortgage rate.
2. Change loan term: You can choose to increase the mortgage term to 30-years if you have a 15-year mortgage and want smaller monthly mortgage payments. You can also do the opposite if you have additional funds saved: you can change the 30-year to a 15-year and pay a lower amount in total interest as the loan is amortized over a smaller period.
3. Cash-out refinance: A big advantage of refinancing is also the ability to borrow cash with your home equity as collateral. In a cash-out refinance, you take a larger loan, pay off your original mortgage, and keep the remainder. This is similar to taking a home equity line of credit (HELOC). Our mortgage refinance calculator allows you to add the option of cash-out refinance and shows you the changes in savings and interest over the term of the mortgage. Calculate how much cash-out refinance you could be eligible for with our cash-out-refinance calculator.
4. ARM to fixed-rate: An adjustable-rate mortgage (ARM) is a home loan where the mortgage rate is not constant through the life of the mortgage. Instead, the rate is based on a benchmark index that can increase and decrease. The benchmark index for example can be the prime rate which is linked to the fed funds rate. ARM’s result in unpredictable monthly mortgage payments making it very difficult to plan out into the future, therefore, you can change your mortgage into a fixed-rate mortgage by refinancing the loan.
5. Remove mortgage insurance: FHA mortgage insurance premium (MIP) is required for all FHA loans. The only way FHA MIP can be removed is if you have 20% equity in the home and you refinance the mortgage. Private mortgage insurance (PMI) unlike FHA MIP can be removed once you reach a loan-to-value (LTV) ratio of 78%.

What are the costs associated with refinancing?

Refinancing has several benefits and advantages. However, there are closing and mortgage refinance costs which are usually 3% - 5% of the refinance loan amount. These fees include the following:

1. Lender fees, mortgage application, and any loan origination charges
2. Home appraisal expenses, documentation, credit report check
3. Title and insurance fee
4. Escrow fees for property taxes and homeowner’s insurance

How do I refinance my mortgage?

The process of refinancing a mortgage is similar to the process of purchasing a home, here are the general steps to follow:

1. Determine your financial goal: This is one of the most important steps, you should have a clear understanding of why you want to get the refinance and which short- or long-term financial goal it satisfies. Do you want to reduce monthly expenses or total interest? Change the term? Borrow cash? Remove insurance? Once you are clear on your goal, you can maximize the benefit of your refinance
2. Check your financials: Refinancing to a lower rate requires a good credit score, low debt-to-income (DTI) ratio, and low loan-to-value (LTV) ratio. Check your financials and equity in the home to ensure you will qualify for a lower mortgage refinance rate.
3. Search for the best refinance rates: In order to get the best rate, it is essential to shop multiple lenders and ensure the refinance and closing fees aren’t too high.
4. Select a refinance lender: After determining the best lender with the lowest refinance rate, you will also receive the loan estimate document. This will tell you how much the closing costs will be and whether you want to finance that into your refinance mortgage or pay it upfront. Our calculator allows you to finance the closing costs into the total loan amount.
5. Appraisal: Most lenders will require a home appraisal. Ensure all recent repairs and renovations are known to the appraiser.
6. Closing: All closing costs and fees are paid now (unless it is financed into the loan).

Mortgage refinance and different mortgage programs

Most mortgage programs including FHA loans, VA loans, and USDA loans also have refinance programs:

1. FHA Loans: FHA home loans are mortgages that are insured by the Federal Housing Association (FHA). FHA Loans has one of the easiest procedures for refinancing with the FHA streamline refinance. The FHA streamline refinance reduces the paperwork such as credit documentation & underwriting and most often does not even require a home appraisal.
2. VA Loans: VA home loans are mortgages that are insured by the US Department of Veterans Affairs and are targeted towards eligible veterans. VA loans offer a refinancing option known as the VA interest rate reduction refinance loan (IRRRL) which allows borrowers to refinance their VA loan at a lower refinance rate.
3. USDA Loans: USDA guaranteed home loans are mortgages that are insured by the US Department of Agriculture and the loans are targeted towards median income borrowers in rural areas. The USDA loan program has several refinance options, USDA Streamline refinance, USDA Streamline-assist Refinance and Non-streamline refinance. Check if you are eligible for a USDA Loan on our USDA Eligibility Map page.

How often can you refinance your home?

There are no limits on how often you can refinance your mortgage. However, there is a waiting period after cash-out refinances. Most lenders require you to wait six months if you wish to withdraw cash. It is also essential to consider refinancing costs as they could eat into your potential savings. Each refinance costs about 2% to 6% of the principal mortgage amount.

Each loan type also has a different maximum loan-to-value (LTV) you can borrow from your home. If your maximum LTV is 80%, your mortgage balance and cash-out amount can't exceed 80% of your home value. The following table compares the max LTV for each loan type.

*Excluding USDA Guarantee Fee

Reasons why you should not refinance

There are several reasons that might prevent you from refinancing:

1. Poor credit: If your credit score has dropped since the time you got your mortgage, a refinance may not be the best option for you as you could receive a higher refinance rate.
2. Low home equity: If you don’t have enough home equity you will have a harder time getting a lower mortgage refinance rate. In general, 20% equity or a loan-to-value (LTV) ratio of 80% is preferred.
3. High closing costs: If your closing and mortgage refinance costs are too high, then it will eat into your potential refinance savings. You should consider these expenses before refinancing.
4. High mobility: If you plan to sell your house within 5 years, you will likely not benefit from a refinance.
5. Prepayment penalty: A prepayment penalty is a fee that is charged by lenders if you pay all or some of your mortgage early. A high prepayment penalty could make your refinance more costly.

What are Texas' laws for cash-out refinancing?

The State Constitution of Texas highlights specific laws for cash-out refinancing in section 50 (a) (6). For example, your cash-out can't exceed 80% of your home's LTV. Additionally, there is a minimum waiting period for the loan to close. After applying, you must wait at least 12 days for closing. There is also a minimum waiting period of six months between refinances. If you refinance, you must wait at least six months before doing it again. Fortunately, the state has a cap on lender closing costs. Texas has a 2% cap on closing costs related to home equity loans.