Refinancing a mortgage involves replacing your existing loan with a new one, typically to secure a lower interest rate or change the loan term. This calculator helps you determine if the long-term savings outweigh the upfront closing costs.
Key Factors to Consider
Interest Rate Differential: Traditionally, experts suggest refinancing if you can lower your rate by at least 0.75% to 1%.
Closing Costs: Expect to pay 2% to 5% of the loan amount in fees (appraisal, title insurance, origination).
Break-Even Point: This is the number of months it takes for your monthly savings to cover the initial cost of refinancing. If you plan to sell the home before reaching this point, refinancing may not be financially beneficial.
Loan Term Extension: While a lower payment is attractive, extending a 20-year remaining balance back to a 30-year term may result in more interest paid over time, even with a lower rate.
Example Calculation
Imagine you have a $300,000 balance at 6.5% interest with 25 years remaining. Your current payment is approximately $2,025. By refinancing into a 30-year loan at 4.5%, your new payment drops to $1,520.
This results in $505 monthly savings. If your closing costs are $5,000, your break-even point is roughly 10 months. Since most homeowners stay in their house longer than 10 months, this refinance would likely be a smart financial move.
When Should You Refinance?
The best time to refinance is when market rates drop significantly below your current rate, or when your credit score has improved enough to qualify for better terms. It can also be a strategic move to switch from an Adjustable-Rate Mortgage (ARM) to a Fixed-Rate Mortgage for long-term stability.