Mortgage refinancing involves replacing your existing home loan with a new one. This can be done for various reasons, such as securing a lower interest rate, changing the loan term, or tapping into your home's equity. A refinance calculator is an essential tool to help you determine if refinancing makes financial sense based on your current situation and the terms of the new loan.
Key Components of Refinancing:
Current Loan Balance: The outstanding principal amount on your existing mortgage.
Current Interest Rate: The annual interest rate on your current loan. This is crucial for calculating your current monthly payments and total interest paid.
Current Loan Term Remaining: The number of years left on your existing mortgage.
New Interest Rate: The annual interest rate offered on the new mortgage. A lower rate is often the primary motivation for refinancing.
New Loan Term: The duration of the new mortgage. You can choose to extend or shorten the term, which affects your monthly payments and total interest paid.
Closing Costs: Fees associated with obtaining a new mortgage, such as appraisal fees, origination fees, title insurance, and recording fees. These costs must be factored into the overall savings calculation.
How the Refinance Calculator Works
This calculator uses the standard mortgage payment formula to estimate your original and new monthly payments. The formula for the monthly payment (M) is:
$M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]$
Where:
$P$ = Principal loan amount (current loan balance for original, and current balance + closing costs for new loan calculation if closing costs are rolled in)
$i$ = Monthly interest rate (annual rate divided by 12)
$n$ = Total number of payments (loan term in years multiplied by 12)
The calculator then determines:
Original Monthly Payment: Calculated based on your current loan balance, interest rate, and remaining term.
New Monthly Payment: Calculated based on your current loan balance (plus closing costs if applicable), the new interest rate, and the new loan term.
Monthly Savings: The difference between the original and new monthly payments.
Total Interest Paid (Original Loan): The total interest you would pay over the remaining term of your current loan.
Total Interest Paid (New Loan): The total interest you would pay over the term of the new loan.
Total Interest Savings: The difference between the total interest paid on the original loan and the total interest paid on the new loan. This is a key metric to evaluate long-term benefits.
Break-Even Point: The number of months it will take for your monthly savings to offset the closing costs. This helps you understand how long you need to stay in the home and keep the mortgage for refinancing to be worthwhile. It's calculated as: Closing Costs / Monthly Savings.
When Does Refinancing Make Sense?
Refinancing is generally a good idea if:
You can get a significantly lower interest rate: Even a small reduction in interest rate can lead to substantial savings over the life of the loan, especially if you have a high current rate.
Your financial situation has improved: A better credit score may qualify you for a lower rate.
You want to shorten your loan term: This means paying off your mortgage faster, although it will likely increase your monthly payments.
You want to lower your monthly payments: This can be achieved by extending the loan term or securing a lower interest rate, providing more cash flow each month.
Interest rates have fallen since you took out your current mortgage.
However, remember to always consider the closing costs. If the savings from refinancing don't outweigh these costs within a reasonable timeframe (your break-even point), it might not be the best move for your financial goals.
function calculateMonthlyPayment(principal, annualRate, termInYears) {
var monthlyRate = parseFloat(annualRate) / 100 / 12;
var numberOfPayments = parseInt(termInYears) * 12;
if (monthlyRate <= 0 || numberOfPayments 0 && !isNaN(currentInterestRate) && currentInterestRate >= 0 && !isNaN(currentLoanTermRemaining) && currentLoanTermRemaining > 0) {
originalMonthlyPayment = calculateMonthlyPayment(currentLoanBalance, currentInterestRate, currentLoanTermRemaining);
totalInterestOriginal = calculateTotalInterest(originalMonthlyPayment, currentLoanBalance, currentLoanTermRemaining);
}
var newLoanPrincipal = currentLoanBalance + closingCosts; // Assuming closing costs are rolled into the new loan
var newMonthlyPayment = 0;
var totalInterestNew = 0;
// Calculate new loan details if terms are valid
if (!isNaN(newLoanPrincipal) && newLoanPrincipal > 0 && !isNaN(newInterestRate) && newInterestRate >= 0 && !isNaN(newLoanTerm) && newLoanTerm > 0) {
newMonthlyPayment = calculateMonthlyPayment(newLoanPrincipal, newInterestRate, newLoanTerm);
totalInterestNew = calculateTotalInterest(newMonthlyPayment, newLoanPrincipal, newLoanTerm);
}
var monthlySavings = originalMonthlyPayment – newMonthlyPayment;
var totalInterestSavings = totalInterestOriginal – totalInterestNew;
var breakEvenPoint = 0;
if (monthlySavings > 0 && !isNaN(closingCosts) && closingCosts > 0) {
breakEvenPoint = closingCosts / monthlySavings;
}
document.getElementById("originalMonthlyPayment").textContent = formatCurrency(originalMonthlyPayment);
document.getElementById("newMonthlyPayment").textContent = formatCurrency(newMonthlyPayment);
document.getElementById("monthlySavings").textContent = formatCurrency(monthlySavings);
document.getElementById("totalInterestOriginal").textContent = formatCurrency(totalInterestOriginal);
document.getElementById("totalInterestNew").textContent = formatCurrency(totalInterestNew);
document.getElementById("totalInterestSavings").textContent = formatCurrency(totalInterestSavings);
if (!isNaN(breakEvenPoint) && breakEvenPoint > 0) {
document.getElementById("breakEvenPoint").textContent = Math.round(breakEvenPoint) + " months";
} else if (monthlySavings <= 0) {
document.getElementById("breakEvenPoint").textContent = "No monthly savings";
} else if (closingCosts <= 0) {
document.getElementById("breakEvenPoint").textContent = "No closing costs entered";
} else {
document.getElementById("breakEvenPoint").textContent = "N/A";
}
document.getElementById("result-container").style.display = "block";
}