Refinancing a mortgage is all about the numbers. It can be a money-saver for borrowers who can snag a lower interest rate, lower their monthly payments, shorten their loan term or ditch mortgage insurance premiums. Before you shop around for lenders, crunch the numbers to make surerefinancing your existing home loanwill save you money. The Bankrate Mortgage Refinance Calculator will give you an idea of how much you stand to save (or lose).
How to use a mortgage refinance calculator
To start, find your latest mortgage statement. This will give you the numbers you need to fill in the first six fields in the calculator. The next section is a little trickier because it’s hard to know exactly how much closing costs will be until you’re well into the process of refinancing. Bankrate’s closing costs guide can give you an idea of which numbers to use here.
Once you’ve plugged all the numbers into the calculator, you can use the key outputs to determine whether a refinance makes sense. The most common measure is the break-even point. More about that below, but if your closing costs will be $4,800, for instance, and your monthly savings are $200, then you’ll break even in 24 months or two years. If you plan to be in the house well past two years, a refi could make sense.
What is mortgage refinancing?
Mortgage refinancing is when you replace your current home loan with a new one. Just like any other loan, you apply for refinancing, which includes a thorough check of your credit, income, employment history and finances. A lender orders a home appraisal to assess the current market value of your home, too, to evaluate how much equity you have in it.
When you refinance, the borrowed money from your new loan pays off your existing loan. Most people refinance to lock in a lower interest rate and lower their monthly payment, or to shorten the term of their mortgage. You can also get a cash-out refinance, which allows you to borrow against the equity in your home, pulling some portion of the difference between what you still owe and its current value. Many lenders cap cash-out refinancing at 80 percent of the home’s total value on most loan types. Ideally, you’ll also get a lower rate in the process. The money you tap from your home’s equity can be used to consolidate higher-interest debt or to improve your home.
Reasons to refinance a mortgage
Homeowners refinance their mortgages for a variety of reasons. No matter what your motivation is for refinancing, the result should leave you better off financially. Here are a few common reasons why homeowners decide to refinance a mortgage:
- To lock in a lower interest rate and lower their monthly payments. Homeowners who have improved their credit score or lowered their debt-to-income ratio, for example, might be eligible for a better rate today if they refinance. Mortgage rates have been elevated, which has taken much of the wind out of this strategy.
- To switch from an adjustable-rate mortgage, or ARM, to a fixed-rate loan. Borrowers who took out an ARM but plan to stay in their homes may want to refinance into a more stable, fixed-rate loan before the ARM resets to a variable rate and payments become unaffordable, or at least less predictable.
- To pull out cash from their home’s equity. A cash-out refinance lets you tap your home’s equity by replacing your existing mortgage with a new one for a larger loan amount, taking the difference in cash.
- To remove a borrower from the mortgage. Divorce is another reason to refinance to get your former spouse’s name off the loan. This might also apply if you bought a home with another relative or friend. The person who is refinancing the loan into his or her name will have to qualify for the new loan solely with their own income, credit and employment. Don’t forget that removing someone from a mortgage doesn’t remove them from the deed of the home, which may require filing a legal document called a quitclaim deed (check your state’s property laws for guidance).
- To get rid of FHA mortgage insurance. For borrowers with a loan insured by the Federal Housing Administration, known as FHA loans, refinancing into a conventional mortgage can eliminate annual mortgage premium payments once you’ve reached 20 percent equity in your home.
Things to consider before refinancing
Refinancing might make sense, but the wisdom of the decision depends on many factors.
What is the break-even point?
A key consideration when deciding whether to refinance a mortgage is when you’ll break even on your costs. The break-even point is calculated by adding up all refinancing closing costs and figuring out how many years it will take you to make up those costs with the savings from your new mortgage payment compared to your previous one. Refinancing makes more sense if you plan to stay in your home longer than the break-even point, otherwise, you could potentially lose money.
How long do you plan to stay in your home?
Before refinancing, you should first consider how long you plan to stay in your home. Refinancing if you plan to move in a few years doesn’t always make financial sense, even if you get a lower interest rate, because you may not have enough time to break even on closing costs. Most experts say you’ll want to be in your house at least two to five years after refinancing, but you should do your own break-even calculation to figure out what makes the most sense for you.
How much does it cost to refinance a mortgage?
While refinancing can save you money in the long run, it comes with upfront fees. Refinancing usually includes the same fees you paid when you first bought your home, such as:
- Lender fees, including a mortgage application fee, loan origination charges and mortgage points
- Third-party fees, such as the appraisal fee, document recording and a credit check
- Title search/insurance fees
- Escrow costs for property taxes and homeowners insurance
Your closing costs will vary depending on the new loan amount and your credit score, debt-to-income ratio, loan program and interest rate. The national average as of 2021 was $2,375, but the total can range widely depending on the home's value, the mortgage size and the property location.
Shopping around for a lender who not only offers a competitive interest rate but also the lowest fees is worth your time and effort. Because refinancing can cost thousands of dollars, make sure refinancing has a tangible financial benefit to you and that you’ll stay in your home long enough to recoup the fees.
Refinancing next steps and resources
If you’ve looked at the numbers and decided that refinancing makes sense, then it’s time to shop around for a refinance lender. Check with your current mortgage servicer, as well as national banks, credit unions, online mortgage lenders and possibly a mortgage broker to compare refinance rates and terms.
Make sure you get everything in writing, such as fees and interest rates. Lenders will send you a loan estimate that breaks down your new loan details and all fees. Loan estimates are great tools for comparison shopping to give you the clearest picture of which lender will help you meet your refinance goals.
Here are some resources to help you through your refinance:
- Mortgage refinance guide
- Current refinance rates
- How to get the best refinance rate
- Best refinance lenders
- Mortgage refinance resources
