Refinancing a mortgage can be a savvy move for some, while for others, it just doesn’t add up. Using a mortgage refinance calculator can help homeowners weigh the pros and cons of refinancing.
“Refinancing often results in a lower monthly payment, which can be enticing; however, homeowners should pay attention to the transactional costs that are rolled into the new loan, which can considerably drive up the amount owed,” says Michele D. Hammond, Chase Private Client home lending advisor.
There’s also the potential long-term impact, and sometimes much greater cost, of replacing your current mortgage with a new 30-year term. Adding more years to the payment schedule could offset the savings, says Hammond. “For example, if you have 22 years remaining and you refinance into a new 30-year fixed-rate mortgage, that is adding eight years to your repayment schedule,” she says.
By running the numbers and assessing your goals, you can get a better sense of whether refinancing is a good option for you.
A mortgage refinance calculator can help you play out different scenarios to see how a new home loan would affect you. It can help illustrate how much your monthly payment will be and what you will save each month if that’s your main priority.
If you’re looking to shorten your loan term, you can see how switching to a 15- or 20-year term might benefit you. You can also explore a cash-out refinance, which may not only lower your interest rate but provide you with a lump sum of money to pay off other debt or do a home upgrade.
Using a calculator “will give you a better idea of what product you want to focus on when you speak with your lender,” says Hammond.
Before you begin weighing loan options, you’ll need to figure out whether you have enough equity in your home to even qualify for a refinance, says Anna DeSimone, author of “Housing Finance 2020.”
That’s important because the lender will give you a mortgage based on the loan-to-value ratio, which refers to what proportion of a home purchase you’re financing with a loan. Rules depend on the type of loan program you’re using, but lenders typically set the maximum LTV at between 80% and 95%. You’ll need 80% LTV to avoid paying mortgage insurance.
For a home that appraises for $400,000, an 80% LTV is $320,000. If you still owe $350,000 on that loan, you may not qualify for certain loan programs.
Mortgage rates declined across the board this week, with the 30-year fixed rate falling further to 7.07%, according to the Mortgage Bankers Association. Less than two months ago, the rate on a 30-year mortgage was 7.9%. Additionally, the FHA loan rate dipped to 6.84%, making this government-backed mortgage a wise choice for prospective buyers.
Mortgage interest rates are still forecasted to stay higher for longer into 2024. Here are the current mortgage rates, as of Dec. 13:
- 30-year fixed: 7.07% with 0.59 points (previous week: 7.17% with 0.6 points).
- 15-year fixed: 6.67% with 0.58 points (previous week: 6.8% with 0.77 points).
- 5/1 ARM: 6.47% with 0.76 points (previous week: 6.58% with 0.69 points).
- 30-year jumbo loans: 7.22% with 0.37 points (previous week: 7.35% with 0.44 points).
- 30-year FHA loans: 6.84% with 0.72 points (previous week: 6.98% with 0.84 points).
If you know you have ample equity, you’ll need the following information to start your refinance calculations:
- Current mortgage details. What is your current home value? How much do you still owe on your loan?
- The new loan amount. Do you plan to cash out any equity?
- The interest rate. Some calculators will ask what type of credit you have and assign an appropriate interest rate; others may just ask you to plug in the rate that you think you’d get.
- The repayment term, usually 15 or 30 years. The longer the term, the smaller your monthly payment will be and the more interest you will pay over the life of the loan.
- Your ZIP code. Calculators will try to estimate your closing costs (which will be added to the new loan amount) based on the real estate data available in your location.
With these numbers, you can get a rough idea of what your refinanced loan total and monthly payment would be and how that will impact you long- and short-term. Until you get an official quote with a lender, however, keep in mind that this is just an estimate.
One more thing: “You always have to consider the investment you’ve already made in your mortgage,” says DeSimone. Whether your current mortgage is two or 12 years old makes a big difference. Those who have already invested several years can still consider refinancing, says DeSimone, but it should be for a shorter-term loan.
In general, if you’re just a few years into your current mortgage, you don’t plan on moving in the near future, and the interest rates are lower than what you’re currently paying, then refinancing is worth exploring.
But consider your goal as you run the numbers. “If monthly savings is the most important factor, then you should focus on the new mortgage payment,” says Hammond. Just make sure you are comparing apples to apples, she warns, meaning that the new payment should include taxes and insurance so you can compare it with your current payment.
If paying your home off as quickly as possible is the goal, then your focus should be on a reduced term and the interest savings you will get by paying the home off sooner, says Hammond. “It’s always a good idea to pay attention to the new mortgage loan amount compared to the current principal balance because that will quickly show you how much the refinance will cost.”
Finally, if you’re hoping for a cash-out refinance so you can consolidate higher-interest debt or renovate your home, those benefits may also justify refinancing, even if the rate drop and monthly savings are minimal, says DeSimone. “Renovating your home adds to your property value, so the payoff will be in your future home equity,” she says.
No matter your goal, one of the key pieces of information you’ll need when you use a mortgage refinance calculator is the break-even point. “In a refinance, that’s the number of months it will take to offset the closing costs,” says DeSimone.
Expect to pay between 2% and 6% of your outstanding principal in closing costs, depending on where you live. On a $300,000 loan, that’s at least $6,000.
If your refinance costs $6,000 and you’d be saving $400 per month, that would mean you’d make your investment back in 15 months. “If you plan to stay in the home longer … then it makes sense to refinance in that scenario,” says Hammond.
This is why it’s important to consider your plans when refinancing. If you know you’ll be relocating in two years but your break-even period is 30 months, then you’d be losing money by refinancing. On the other hand, if you plan to stay put beyond the break-even point and you can do something worthwhile with all the money you’re saving on your loan each month, it may be worth it.
Some people might ask: Is it worth refinancing for a 0.5 percentage point interest reduction? Or, is it worth refinancing to save $100 a month? The answer depends on your situation. “I don’t think there is a one-size-fits-all rule that folks should follow when looking at a refinance,” says Hammond.
A better question is: What do you want to accomplish with your refinance? If you’re just looking to trim your monthly payments, an interest rate drop can certainly help. Just be sure to weigh all of the other considerations, like the break-even point and how far into your current mortgage you are.
If monthly payments aren’t your biggest concern, refinancing to a shorter term such as 15 or 20 years might be best. “Not only will you get an even lower rate, you’ll build up the equity in your home faster,” says DeSimone.
Whenever interest rates are low, it’s a good time to consider whether refinancing would benefit you. By using a mortgage refinance calculator, you can get a sense of your options before you start a conversation with a lender.
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