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Refinance Mortgage Calculator – How Much Can You Save by Refinancing?
If you have plans to refinance your home loan, you may be looking to save some money on your monthly payments or total interest. While refinancing your mortgage could, in fact, save you tons of cash, it could also end up costing more than you bargained for if you aren’t careful.
That doesn’t mean you should skip the idea of refinancing altogether, though. It just means you should do your homework and take advantage of the tools you have to make sure it’s the right move. Otherwise, you could end up in over your head before you realize it.
What is mortgage refinancing?
A mortgage is a type of loan that is used in the purchase of real estate. There are tons of lenders who offer mortgages: banks, credit unions, independent mortgage lenders and online lenders, for starters.
Every year, hundreds of billions of dollars are loaned out in the form of mortgage loans, and most home buyers will need to borrow money to purchase their homes. Mortgages can be customized in a number of different ways to suit the needs of the borrower, but those needs can change over time.
It’s not uncommon to find after a few years that you have needs that are different than when you first bought your home. Or, maybe interest rates have dropped. What seemed like good terms at that time might not seem so great now.
The good news is that no one is stuck with a mortgage. There’s a way to change the terms of your mortgage, and that’s with a mortgage refinance loan.
A refinance mortgage loan is nothing more than a replacement mortgage loan. A refinance essentially just pays off the old mortgage and replaces it with the new loan and new terms. Your interest rate, loan length, and the amount borrowed can all be changed with a refi.
A refinance can also help to lower monthly payments, give you access to home equity in the form of cash and can cancel mortgage insurance requirements, among other things.
There are different kinds of refinance loans, too. For example, a cash-out refinance lets you borrow money against your equity while refinancing. No closing cost refinances let you roll your closing costs into the principal of your mortgage.
Understanding the breakeven point and why it matters
The upfront closing costs for a refinance need to be addressed before you sign on any loan so that you know what your breakeven point is. The breakeven point is the point when the closing costs have been offset by your monthly savings from the refinanced mortgage. This factor is important because it tells you whether or not it makes fiscal sense to refinance.
You can do the math to figure out your breakeven point. Simply divide the total closing costs by your monthly savings. The result lets you know how many months until you break even on the new loan. Here’s an example:
- Calculate your refinancing closing costs. Example: $4000.
- Calculate your monthly savings on mortgage payments. Example: $125 each month.
- Divide the total refinancing cost by the monthly savings to get the number of months until break-even.
- Example: $4000 divided by $125 equals 32 months. In this case, you should consider refinancing only if you plan to live in the home for at least 32 months.
Once you know your breakeven point, one of the easiest ways to make sure you’re making the right move by refinancing is to use one of the best mortgage refinance calculators. This will help you to get an accurate estimate of how much you can expect to pay if you refinance your mortgage.
This type of calculator is very helpful in comparing the deal you might get based on where you live, your loan term, the loan amount, your credit score, and other factors.
When does it make sense to refinance a loan?
There have been times when homeowners have rushed to refinance their mortgages in droves — usually when interest rates drop. Interest rates aren’t the sole reason to refinance, though.
Before you jump into the decision for when to refinance your mortgage, you need to understand why it might make sense for you to take out a new home loan. There are many reasons for homeowners to consider refinancing, including:
- To obtain a lower interest rate. A lower rate will decrease the amount of interest you pay over the life of the loan, and in turn, lower your monthly payments.
- To shorten or lengthen the term of your mortgage. Shortening the term of your mortgage will mean less money spent on interest payments, while lengthening the loan can result in a smaller monthly payment.
- To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa. If you think interest rates will continue falling for some time, an adjustable-rate mortgage can make sense. If you think interest rates are ready to rise, it can make sense to switch into a fixed-rate mortgage instead. You can do both with a refinance.
- To access cash. You can use a refi to tap into home equity for an emergency, a large purchase or to consolidate debt. Home equity is a good thing. By cashing out some of your equity in a refinance, you can get access to the cash you need, often at a lower rate than you’d get with a credit card or personal loan.
Where can I find the best refinance rates?
Sometimes you just need a little help to find the best mortgage refinance rates out there. According to research from Freddie Mac, shopping for more than one refinance quote can be the very best way to save money when it comes to refinancing your mortgage.
In fact, Freddie Mac’s research showed a $1,500 savings over the life of the loan simply by getting one additional rate quote. The savings increased with each additional quote received, and by shopping around to five different lenders Freddie Mac found borrowers could save $3,000 over the life of the loan.
[ Read more: Should I Refinance While Interest Rates Are Low? ]
The smart route for finding the best refinance rates is to compare lender rates and see how much you can save on your mortgage refinance. Start with your current lender, who may have a vested interest in keeping you as a customer. You can shop around for rates for 45 days without the hard pulls hurting your credit score, so make sure you do your homework during that time.