Refinancing is usually worth it if it saves you money over the life of the loan. Use this calculator to estimate what the overall savings will be with your new refinanced mortgage loan. Keep in mind that the calculations are an estimate only, and that your monthly payment may be different from what’s shown on the calculator.
Trying to decide if you should refinance? Here’s a look at some of the most common reasons why you might consider refinancing your mortgage.
Getting a lower interest rate is by far the most popular reason to refinance a mortgage. If rates are lower than when you got your original loan, refinancing can reduce your monthly mortgage payments. It can also help you save thousands of dollars in interest over the life of your loan.
When you refinance, you can select a different loan type than the one you currently have in order to reap the benefits of that loan type. For example, if you have an adjustable-rate mortgage (ARM) and the rate is about to increase, you can change to a more stable fixed-rate mortgage. Or if you have an FHA loan and you want to stop paying mortgage insurance, you may be able to refinance to a conventional loan without mortgage insurance.
If you have enough equity in your home, you may be able to do a cash-out refinance. With cash-out refinancing, you refinance your current home loan for more than the amount you currently owe, and keep the extra money to spend on things like a kitchen remodel, new siding, or other home projects you’ve been dreaming about.
In most cases, shortening your loan term will allow you to pay off your principal faster. A shorter term often means you’ll have a higher monthly payment — however, you’ll likely pay less interest over the life of your loan because you are making fewer payments, and because shorter loan term loans (i.e. 15-year fixed) typically have lower interest rates than those with a longer term (i.e. 30 year fixed).
To accurately estimate your refinance savings, you’ll need some information about your current mortgage and your potential new one. Below are the key pieces of information you’ll need and where to find them.
So, is refinancing worth it? Generally, a refinance is worth it if you’ll be in the home long enough to reach the “break-even point” — the date at which your savings outweigh the closing costs you paid to refinance your loan.
For example, let’s say you’ll save $200 per month by refinancing, and your closing costs will come in around $4,000. In order to make this refinance scenario worth it, you’ll need to be in the home at least 20 months to hit your break-even point and make up that $4,000. If you plan to stay in the home at least that long, then a refinance is most certainly worth it.
Another common way to think about refinance costs is the “two-year rule.”
The two-year rule says that, generally, the interest you save over the first two years should be equal to or more than your total refinance closing costs.
Determining your break-even point isn’t the only way to evaluate a potential refinance. You should also ask yourself the following questions to gauge whether it’s the right move for your household:
You’ll want to have at least 20% equity in your home before refinancing. If you have less, you’ll probably have to pay for private mortgage insurance, which could increase your monthly payment and lower your potential savings.
You don’t need perfect credit to refinance, but your score will play a role. The better your score, the better your interest rate will be, and the more you’ll stand to save.
Before you consider a refinance, you should have at least a rough idea of how long you plan to be in the home. If you’re not sure or expect changes in your job or living situation in the near future, a refinance might not be wise.
Lowering your rate and monthly payment are just two of the things you can do with a refinance. Refinancing can also help you shorten your loan term and pay off your mortgage sooner, or you can use it to tap home equity for home improvements or to pay off higher-interest debts.
You should have a good idea of how much is left on your loan balance and how long you have until you pay it off before refinancing. Also, check to see if there are any prepayment penalties. If there are, these could eat into your savings as well.
If you want to maximize your mortgage refinance savings, it’s important to shop around first. We recommend getting quotes from at least three lenders, and comparing each of these on interest rate, closing costs and other terms.
Want to see what rates lenders are willing to offer you?Compare rates from major refinance lenders today. Start here (Jan 25th, 2020)