Mortgage Refinancing Calculator: Should I Refinance My Home?
Mortgage refinancing is when a homeowner takes out another loan to pay off—and replace—their original mortgage. A mortgage refinance calculator can help borrowers estimate their new monthly mortgage payments, the total costs of refinancing and how long it will take to recoup those costs.
What is mortgage refinancing?
Mortgage refinancing is when you swap one home loan for another to access a lower interest rate, adjust the loan term, or consolidate debt. mortgage Refinancing requires homeowners to complete a new loan application and may include a home appraisal and inspection. Lenders also rely heavily on an applicant’s credit score and debt-to-income ratio when deciding whether or not to extend a new loan.
In addition to the qualification process, refinancing costs can be significant, totaling up to 6% of the original loan principal. So it’s important to consider whether refi is the right move for you.
Common Reasons to Refinance a Mortgage
Consider refinancing your mortgage if you want to:
- Take advantage of low interest rates. If interest rates are falling, now may be a good time to refinance your home mortgage.
- Convert from an adjustable-rate to a fixed-rate mortgage. For borrowers with adjustable-rate mortgages, the risk of higher interest rates can be greater. mortgage Refinancing into a fixed-rate mortgage can help you lock in a lower rate before the interest rate on your ARM changes.
- Capitalize on your improved credit score. Mortgage refinancing can also be a good option if your credit score has improved since you took out your original home loan.
- Extend the mortgage term to reduce payments. If you need to lower your monthly mortgage payment, consider refinancing to extend the term of your loan. Just remember that a longer mortgage means you’ll pay more interest in the long run.
- Shorten your mortgage term. As opposed to extending the mortgage term, some homeowners refinance to shorten it. Although your monthly payment will increase, shorter mortgage terms typically come with lower interest rates—plus you’ll pay less in interest over the life of the loan.
- Equity or Debt Consolidation. Mortgage refinancing can also be used to consolidate debt or otherwise cash in on home equity. A homeowner can do this by borrowing more than they owe on their current mortgage. However, mortgage refinancing costs can add up quickly, so a cash-out refinance may not be the best bet.
How much does it cost to refinance a mortgage?
Before you decide to refinance your mortgage, evaluate the cost of mortgage refinancing and whether it’s worth the long-term savings. Generally, the total refinancing fee between 3% and 6% of the principal outstanding on the original mortgage loan. This includes closing costs such as lender and attorney fees, title search and insurance costs, and document preparation. Lenders should also prepare to cover any appraisal and inspection costs required by the lending institution.
Some lenders offer “no-cost” refinancing that helps borrowers reduce up-front mortgage refinancing fees. Under this option, the borrower usually absorbs the fee through a higher interest rate or pays it periodically as part of the loan principal. However, mortgage refinancing is never truly free.
Understanding your mortgage’s break-even point
Once you calculate the cost of refinancing, determine how many years it will take to break even with the new monthly payment—or recoup the cost of refinancing your mortgage. This break-even point is the date at which you can take advantage of your new lower payment instead of covering the refinancing fee. To calculate your mortgage’s break-even point, follow these calculations:
- Subtract your new, refinanced monthly mortgage payment from your current monthly payment to determine your monthly savings.
- Determine your tax rate, then subtract it from 1 to determine your after-tax rate.
- Multiply your monthly savings by your after-tax rate to get your after-tax savings.
- Calculate the total fees and closing costs of your new mortgage loan and divide it by your monthly after-tax savings to determine the number of months it will take to recoup the cost of refinancing your mortgage—the break-even point.
For example, if you’re refinancing a $300,000, 20-year, fixed-rate mortgage at 6% with a new 4% interest rate, refinancing will reduce your original monthly mortgage payment from $2,149.29 to $1,817.94—a monthly savings of $3.351. Assuming a tax rate of 22%, the after-tax rate would be 0.78, resulting in an after-tax savings of $258.45 ($331.35 x 0.78 = $258.45). Finally, if you face $9,000 in refinancing costs, it will take about 35 months to recoup the refinancing costs ($9,000/$258.45 = 34.8).
How long you plan to stay in your home and why it matters
When considering whether to refinance your mortgage, also consider how long you plan to stay in your home. The length of time you intend to own a piece of property can affect whether refinancing is worth the cost.
For example, if you only expect to own the home for a few more years, you likely won’t save enough on the mortgage payment to justify the additional cost of refinancing. Alternatively, it may make more sense to refinance your permanent home because you will have more time to recoup the costs of the refinance.
How did Forbes Advisor estimate your new monthly mortgage payment?
Forbes Advisor’s mortgage refinance calculator lets you estimate your new monthly mortgage payment using your current and refinance loan terms. Based on that information, it also calculates how much you’ll save in monthly payments and interest over the life of the loan. You can use a calculator to calculate the total cost of refinancing and the number of months it will take to recoup that cost (your break-even point).
To make these calculations, our tool evaluates this data:
Current loan details. The first part of the mortgage refinance calculator requires the input of current numbers such as the monthly payment, the loan’s interest rate, and the remaining balance and term.
New loan conditions. Use this section of the calculator to estimate your new mortgage payment based on the new interest rate and loan term. Play around with interest rates and loan terms to find a target payment that works for you.
point. Mortgage points are prepaid interest, each equal to 1% of your outstanding mortgage balance—or the new loan value. This type of payment increases the upfront cost of mortgage refinancing the mortgage, but each point lowers your interest rate by 0.25%.
Refinancing fee. The final part of the calculator adds up the costs of refinancing, including application fees, credit checks, title searches and insurance, document preparation and local fees.
Find the best rates to refinance your mortgage
The cost of refinancing a mortgage can add up quickly, so it’s important to research which lenders offer the most competitive interest rates and fees. To find the best mortgage refinancing terms, start by looking at your current lender. Likewise, if you already have a relationship with another bank, it can likely streamline the application process and offer more favorable terms.
If you’re getting a traditional mortgage, nationally chartered or community banks are usually the best places to start. Shop around a variety of major banks, local banks and credit unions to make sure you get the best terms for your needs and credit history. Also keep in mind that if you want to refinance quickly, you can consider an alternative lender, such as an online non-bank company – although these usually come with a higher interest rate.
To get the best refinance rates, consider these factors before applying:
- Credit score. Your credit score is an important part of how lenders calculate loan eligibility and, ultimately, interest rates. For example, in June 2020, myFICO, a division of the company that produces the most widely used credit scores, reported that borrowers with credit scores between 760 and 850 could expect an APR of about 2.9% on a 30-year, $300,000 mortgage. can; Conversely, a score between 660 and 679 can earn an interest rate closer to 3.5%.
- Home equity. The borrower’s loan-to-value ratio — the amount outstanding on the current mortgage loan divided by the home’s current value — is also an important factor during the mortgage refinancing process. You must have at least 5% equity in your home before refinancing, but this number varies depending on the type of mortgage. If you have less than 20% equity in your home, expect to pay mortgage insurance.
- Availability of cash to lower your interest rate. Paying points — a lump sum fee paid to the lender at closing — allows you to get a lower interest rate on your new loan. Also, your lender may be willing to negotiate a larger interest rate reduction than the standard 0.25% per point.
- employment status. Before mortgage refinancing a mortgage, lenders want to know that you can make the monthly payments. Compile employment documents like recent W-2s and tax returns—especially if you’re self-employed or have recently changed jobs—before applying for a new loan.
- Debt-to-income ratio. Ideally, your new mortgage payment should be less than 30% of your monthly income; Total household debt should be less than 40% of your monthly income.