Mortgage Refinance Calculator: Should You Refinance?

Refinancing is usually worth it if you’ll save money over the life of your loan. Use this mortgage refinance calculator to estimate how much a new loan could save you.

Keep in mind this calculator provides an estimate only; your new monthly payment may be different from what’s shown.

To get a more accurate number, request estimates from lenders so you can see how low of an interest rate and payment you qualify for.

See today’s mortgage rates, June 13, 2024

Refinance Calculator

Should I refinance my mortgage?

Are you trying to decide whether to refinance your remaining mortgage loan amount?

Here’s a look at some of the most common reasons to consider refinancing.

Lower your interest rate

Getting a lower interest rate is by far the most popular reason to refinance a home loan.

If today’s rates are lower than the rate on your current loan, refinancing could substantially reduce your monthly mortgage payments. A refinance could also help you save thousands of dollars in interest over the life of your loan.

Switch your mortgage type

Refinancing gives you a chance to choose a different loan type. Your new loan can reflect your current financial life instead of reflecting your needs as they were when you took out the original mortgage.

For example, if you have an adjustable-rate mortgage (ARM) and the interest rate is about to increase, you can change to a more stable fixed-rate mortgage with your refinance loan.

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 that does not require private mortgage insurance.

Homeowners can also choose a shorter mortgage term when they refinance.

Replacing a 30-year mortgage with a 15-year loan, for example, can save a lot in interest. But keep in mind that a shorter loan term results in higher monthly payments.

Pay off your loan faster

In most cases, shortening your mortgage term will allow you to pay the loan off faster.

A shorter term often means you’ll have a higher monthly payment. But you’ll likely pay less interest over the life of the loan because you are making fewer payments.

And shorter loan terms, like a 15-year fixed mortgage, usually offer lower interest rates than a longer-term loan.

If the higher payments on a shorter loan term are too high for your budget, there are other ways to pay off your mortgage early.

For instance, you might refinance to a better interest rate and lower your monthly payments. Then, you can take the money you’re saving and use it to “prepay” your mortgage by paying a little extra each month.

This way, you’d pay the principal off faster and save money on interest in the long run without committing to a shorter-term loan’s higher monthly payments.

Cash-out your home equity

If you have enough equity in your home, you may be able to do a cash-out refinance.

With a cash-out refinance, your new loan amount is higher than your current mortgage balance. The bigger loan amount is first used to pay off your existing loan, and the ‘extra’ is returned to you as cash.

You can spend money you get from a cash-out refi on anything, but some of the best uses include home improvements, debt consolidation, paying for college education, or buying another property.

Verify your refinance eligibility

Refinance calculator terms and definitions

To get the most precise estimates from our mortgage refinance calculator, you’ll need some information about your current mortgage and your potential new loan.

Below are the key pieces of information you’ll need and where to find them.

Current loan balance: Refers to the remaining principal balance on your existing loan. This can be found on your latest mortgage statement.

Current monthly payment: Includes only the payments you make toward principal and interest each month. If part of your monthly payment also goes toward escrow (to cover property taxes and homeowners insurance), you should check your mortgage statement to see the exact portion that goes toward principal and interest. Your statement should also show this breakdown.

Interest rate: The amount you pay each year to borrow money from your lender. To use a refinance calculator, you’ll need both your current loan’s mortgage interest rate and your expected new interest rate. If you’re not sure what rate your new loan may carry, you can get an estimate here.

Loan term: The loan term measures how long your new mortgage loan lasts. Usually, refinancing to a 30-year loan will lower monthly payments the most. If your goal is to pay off your loan sooner, you may want a loan with a shorter mortgage term.

Estimated closing costs: You’ll pay closing costs to refinance your mortgage, just as you did with the initial loan. These costs vary by mortgage lender but usually come out to around 2 to 5 percent of your total loan balance.

Closing costs typically include loan origination fees, appraisal fees, and legal fees, as well as prepaid interest, taxes, and insurance.

How to decide if refinancing is worth it

So, is refinancing really worth it? Generally, a refinance is worthwhile 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. Each month you’re in the loan beyond your break-even point adds to your total savings.

  • Monthly savings: $200
  • Refinance closing costs: $4,000
  • Time to break even: $4,000 / $200 = 20 months

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.

Use the “two-year rule” when refinancing into a shorter loan term. You likely won’t save money on your monthly payment by converting your 30-year loan into a 15- or 10-year one. But you will save a ton in interest over the life of the loan.

Verify your refinance eligibility

5 questions to ask yourself before refinancing your mortgage

Determining your break-even point isn’t the only way to decide whether to refinance.

You should also ask yourself the following questions to gauge whether a new loan is the right move for you:

1. How much equity do you have in your home?

Your equity is the portion of your home value that you already own. If your house is worth $200,000 and you owe $175,000 on your existing mortgage, your equity would be $25,000, or 12.5 percent.

If you have at least 20 percent equity in your home, you may be able to remove private mortgage insurance or FHA mortgage insurance with a refinance. This will lower your payment even further and add to your overall savings.

For a cash-out refi you typically need to have substantial equity, because lenders will require you to leave at least 20 percent of the home’s value untouched.

For example, if your home was worth $200,000, your new loan would max out at $160,000 (80% LTV). This leaves $40,000 — or 20 percent equity — in the home.

If you owed $120,000 on your existing mortgage, your cash back could reach up to $40,000. But if you owed $160,000 on your current home loan, you couldn’t get any cash back.

2. What’s your credit score?

You don’t need perfect credit to refinance, but your credit score will play a role. The better your score, the better your interest rate will be — and the more you’ll stand to save.

Here are the typical minimum credit score requirements for major refinance programs:

  • Conventional refinance — 620
  • Conventional cash-out refinance — 620
  • Jumbo loan refinance — 660-700
  • FHA refinance — 580
  • FHA cash-out refinance — 600
  • FHA streamline refinance — No credit check required
  • VA cash-out refinance — 620
  • VA IRRRL — No credit check required

Keep in mind, these credit score requirements will vary by lender. So if your current lender says your score is too low to refinance, you may have better luck with another.

3. How long will you be in the home?

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 if you expect changes in your job or living situation in the near future, a refinance might not be wise.

4. What’s your refinance goal?

Lowering your rate and current 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 the new loan to tap home equity for home improvements or to pay off higher-interest debts. Home improvements can add to your home value, enhancing your real estate investment even more.

5. What does your current loan look like?

Before choosing to refinance, you should have a good idea of how much you owe on your current home loan and how long it would take you to pay off the balance.

If you’ve almost paid off your current loan, you could wind up paying more in total interest payments by resetting your balance with a refinance — even at today’s rates.

For instance, if you’re eight years into a 30-year loan, consider refinancing into a 20-year loan. You could potentially shave a couple years off your loan and reduce your payment.

Also, check to see if your current lender charges prepayment penalties. These fees would add to your total costs, eating into your savings as well. If your current home loan was originated before 2014, it’s possible you could face a prepayment penalty.

Verify your refinance eligibility

Mortgage refinancing FAQ

Is it worth it to refinance for 1 percent?

It could be. To find out for sure, compare your closing costs, which you’ll pay up front, to your long-term savings which build up gradually. If you can save more than you’ll spend, it’ll be worthwhile to refinance. Often, answering this question depends on how long you plan to stay in the home. Refinance savings build gradually over time while closing costs are due up front.

How do I know if my refinance is worth it?

Refinancing is worth it when your new home loan accomplishes a goal your current home loan could not accomplish. For example, some borrowers just want to eliminate their existing FHA loan’s mortgage insurance premiums, and refinancing into a conventional loan can make this happen. Others want a lower-rate loan, a lower monthly payment, or to cash out equity. Whether or not a refinance is worth it for you will depend on your existing mortgage and your financial goals.

What’s the downside of refinancing?

A refinance starts your loan over. So you need to be sure you won’t end up paying more in the long run — which can happen with a longer term even when your monthly payments are reduced. Refinancing also costs money, and applying for a new loan will require some time out of your schedule. This could be time and money well spent if it helps you save money for years into the future.

Does refinancing hurt your credit?

Getting any new loan can lower your credit score temporarily. But the impact of a mortgage refinance on your credit score should be minimal. Why? Because your new loan replaces your existing loan, and the new loan is usually about the same size as the old loan. A cash-out refi could have a bigger effect on your credit profile because it results in a larger mortgage balance.

What is the formula for refinancing?

Divide your closing costs by the amount of money you’ll save each month to find out how long you’ll need to break even on your new mortgage. For example, if you’re spending $4,000 on closing costs and saving $200 a month on your mortgage payment, you’d divide $4,000 by $200 which equals 20 months. If you expect to stay in your home longer than 20 months, you’ll save money. If you’re getting a shorter-term loan, the math is more complicated. You’ll need to compare long-term interest charges on your new and old loans. Generally, if you can save enough interest in the first two years to cover the new loan’s closing costs, a refinance should save you money. And the longer you stay, the more you’ll save.

Can I buy a car while refinancing my house?

Any time you’re getting a mortgage, it’s usually best to put off other large purchases until after the mortgage closes. Buying a car will likely affect your credit score and debt-to-income ratio (DTI) which could make it harder to finalize your mortgage. Even if you paid cash for the car, your lower bank account balance could complicate underwriting.

When should you not refinance?

You shouldn’t refinance if you plan to move or sell soon. If you leave the loan too early, you won’t have time to recover the expense of closing costs and start saving money. You can use the refinance calculator above to estimate the amount of money you could save with your refi. For a more precise estimate, check with a few lenders.

Always shop around for the best refinance rate

If you want to maximize your mortgage refinance savings, you’ll have 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.

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By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.