Refinance Mortgage Calculator

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What is Mortgage Refinancing?

Mortgage refinancing is like trading in your old car loan for a new one with better terms. You replace your existing home loan with a brand new loan, ideally with a lower interest rate, different term length, or both.

Think of it this way: if you bought your home when interest rates were 7%, and rates have dropped to 5.5%, refinancing lets you "upgrade" to that lower rate. The new lender pays off your old loan, and you start making payments on the new one.

When Does Refinancing Make Sense?

Refinancing isn't always the right move. Here are the key situations when it typically makes sense:

1. Interest rates have dropped significantly A general rule of thumb: if you can lower your rate by at least 0.5-1%, refinancing is worth exploring. On a $300,000 loan, dropping from 7% to 6% saves about $200/month.

2. Your credit score has improved If your credit was 650 when you bought your home but is now 750, you may qualify for much better rates than before.

3. You want to change your loan term

• Switch from a 30-year to a 15-year mortgage to pay off your home faster
• Switch from a 15-year to a 30-year to lower monthly payments

4. You need to tap home equity (Cash-out refinance) If your home has appreciated significantly, you can refinance for more than you owe and receive the difference in cash.

5. You want to remove PMI If you originally put down less than 20%, refinancing when you have 20%+ equity can eliminate private mortgage insurance.

Understanding the Break-Even Point

This is the most important number when deciding whether to refinance.

Refinancing isn't free—you'll pay closing costs typically ranging from 2-6% of your loan amount. The break-even point tells you how long it takes for your monthly savings to exceed these upfront costs.

Example:

• Closing costs: $6,000
• Monthly savings: $200
• Break-even: 6,000 ÷ 200 = 30 months (2.5 years)

The rule: If you plan to stay in your home longer than the break-even period, refinancing makes financial sense. If you're moving in 2 years and your break-even is 3 years, don't refinance.

Common Refinancing Costs

Understanding what you'll pay helps you make an informed decision:

Pro tip: Some lenders offer "no-closing-cost" refinances, but they typically charge a higher interest rate to compensate. Do the math to see which option saves more over your expected time in the home.

Should You Buy Discount Points?

Discount points are an optional upfront fee you can pay to reduce your interest rate. One point equals 1% of your loan amount and typically reduces your rate by 0.25%.

Example on a $300,000 loan:

• 1 point = $3,000 upfront
• Rate reduction: 6.5% → 6.25%
• Monthly savings: ~$50
• Break-even on points: 60 months (5 years)

When points make sense:

• You plan to stay in the home for many years
• You have extra cash and want to maximize long-term savings
• The after-point rate is significantly better

When to skip points:

• You might move or refinance again within 5-7 years
• You'd rather keep cash for emergencies or investments

Cash-Out Refinancing Explained

A cash-out refinance lets you borrow more than your current loan balance and pocket the difference. It's a way to tap your home's equity without selling.

Example:

• Home value: $400,000
• Current loan balance: $250,000
• Cash-out refinance: $300,000
• Cash received: $50,000 (minus closing costs)

Common uses for cash-out funds:

• Home improvements (can increase property value)
• Debt consolidation (replacing high-interest credit card debt)
• Education expenses
• Emergency fund

Caution: You're increasing your debt and using your home as collateral. Make sure you can afford the higher payments, and avoid using the cash for depreciating assets or non-essential expenses.

Rate-and-Term vs. Cash-Out: Which to Choose?

Rate-and-Term Refinance:

• Goal: Lower your rate and/or change your loan term
• New loan amount ≈ current balance
• Lower closing costs (typically)
• Better rates available

Cash-Out Refinance:

• Goal: Access home equity as cash
• New loan amount > current balance
• Higher closing costs
• Slightly higher interest rates (0.125-0.5% more)

Most homeowners looking purely to save money should choose rate-and-term refinancing. Cash-out makes sense when you have a specific, financially sound use for the funds.

Tips for Getting the Best Refinance Deal

1. Shop multiple lenders - Rates can vary significantly. Get quotes from at least 3-5 lenders including banks, credit unions, and online lenders.

2. Check your credit first - Review your credit report for errors. Even small improvements to your score can mean better rates.

3. Time it right - Watch mortgage rate trends. Rates fluctuate daily based on economic conditions.

4. Negotiate closing costs - Many fees are negotiable. Ask lenders to match competitors or waive certain fees.

5. Consider the full picture - Don't just look at the rate. Compare the APR, which includes fees, for a true cost comparison.

6. Lock your rate - Once you find a good rate, lock it in. Rate locks typically last 30-60 days.

7. Have documents ready - Speed up the process with pay stubs, tax returns, bank statements, and current mortgage info.