Calculator Legend
Loan amount: the actual amount you are borrowing, not counting closing costs or interest.
Interest rate: the interest rate quoted on the loan. The calculator lets you specify between 1% and 18% (though you will almost certainly not get either such a low or such a high interest rate). The calculator assumes your current mortgage and the refinance mortgage each have a fixed interest rate. A large majority of mortgages in the US have a fixed interest rate. Still, if you have an adjustable-rate mortgage, refinancing may be a good option. Rates are at a relative historic low. Refinancing to a fixed-rate mortgage will lock in the current interest rate. Of course, if you are planning on moving within a few years, refinancing may well not be worth it.
Term: the amount of time you will be making payments. The term assumes you don't make extra payments to pay down the mortgage earlier. Generally, the longer the term of the mortgage, the lower the monthly payments. The calculator lets you select from 1 to 30 years. Traditionally, 30-year mortgages have been the most common. But shorter mortgages mean you will pay less interest over the life of the mortgage.
Payments made: the number of monthly payments you have made on your mortgage already.
Property taxes: the total amount of property taxes you will have paid this year.
Home insurance: enter the total cost of all your homeowner's insurance for one year. If you also have mortgage insurance, add it in.
Closing costs: what you must pay when you actually "close" or get the refinance mortgage. These are not the closing costs you might have paid when you first took out your existing mortgage. The calculator assumes you will pay the closing costs upfront. If you add the closing costs to the mortgage loan amount, you will have a higher loan principal. A higher loan principal means more interest over time. The closing costs of refinancing a mortgage are similar to the costs of getting a mortgage in the first place. There are fees to pay for paperwork and other miscellaneous costs and points.
Mortgage Refinancing Benefits
- Lower interest rate. Interest rates remain relatively low. Refinancing a mortgage made a few years ago or more could get you a lower interest rate. A lower interest rate means a lower monthly payment. Have an adjustable rate mortgage? Refinance to a fixed rate mortgage before rates rise again.
- Cash. Has your home's property value increased? You could cash in on your higher property value. Get cash for major expenses such as education, payoff of credit card or other debt. You could even shorten your mortgage term.
Cost of Refinancing: Closing Costs
As with new mortgages, refinance mortgages come with closing costs. Closing costs are what you must pay when you actually "close" or get the mortgage. The costs of refinancing a mortgage are similar to the costs of getting a mortgage in the first place. There are fees to pay for paper, other miscellaneous costs, and points.
Important term: a point is equal to 1% of, in this case, your new mortgage amount. Points are included in your closing costs. Usually the lower the interest rate, the more points will be required. You can find a 0-point mortgage. Just make sure it doesn't come with a higher interest rate that will wipe out all the savings.
Note: the calculator only asks for a single value for closing costs. The calculator does not ask you to list fees and points separately. You have to add up all your closing costs beforehand. Then enter the total in the "closing costs" field of the calculator. If you want to "guess-timate" a value, plug in roughly $1,000 for each $100,000 remaining on the mortgage.
How Do You Improve the Rate on Your Refinanced Mortgage?
The major reason for refinancing your mortgage is to get a more favorable, that is lower, interest rate. You can get an even lower interest rate if you follow these guidelines:
- Make sure you have equity in your home. Equity is the difference between what your house is worth and what you still owe. Equity decreases your loan-to-value (LTV) ratio, an important factor in the qualification formula. Equity also makes you a more attractive credit risk.
- Maintain a positive credit history. A good bill payer makes a more comfortable credit risk.
- Keep a sensible relationship between income and debt levels. If you’re spending close to or more than what you make, sooner or later, you look like a bad credit risk.
When Is the Best Time to Refinance?
A good time to refinance is when all the following are true:
- The rates are substantially lower than what you now have (2% or more).
- You plan on remaining in your home for more than 2 or 3 years after refinancing.
- You have equity in your home.
- Your personal credit history is in good order.
- You’re sure refinancing will save you money overall. Take into consideration refinance loan closing costs.
Mortgage refinancing can give you a great financial boost. You just have to make sure the closing costs of refinancing are less than the money you will save.