What does refinancing a mortgage do?
Refinancing replaces your current mortgage with a new one, usually to get a lower rate, a different term, or both. A new loan comes with its own closing costs, which you pay upfront or roll into the loan. The saving has to be weighed against those costs and against how long you plan to stay in the home.
How do I use it?
Enter the balance you still owe, the rate and years left on your current loan, and the rate and term of the new loan. Enter the closing costs from the lender's estimate. Compare the monthly saving with the time to repay the closing costs.
How does the calculation work?
Both payments come from the standard level-payment formula, using the balance and each loan's rate and term. The monthly saving is the current payment minus the new one. The time to repay the closing costs is the closing costs divided by that saving.
What can the result not tell me?
The calculator does not include points, appraisal and title fees beyond the total you enter, or the effect of a longer term on the total interest paid over your life. It also assumes you keep the new loan to the end. Check the Loan Estimate from the lender before you decide.
What does refinancing a mortgage mean?
Refinancing replaces an existing loan with a new one, usually to get a better interest rate, a different term, or a different loan structure. The refinancing article on Wikipedia describes it as the replacement of an existing debt obligation with another that carries different terms. The most common reason borrowers give is to take advantage of a better interest rate.
A mortgage refinance is only worth doing when the savings are larger than the costs of getting the new loan. This calculator compares the current loan with the new one, so you can see whether the change makes sense.
How do closing costs affect the decision?
Refinancing usually involves closing costs, which can include appraisal, title, and lender fees. Those costs are paid up front or added to the new loan, and they reduce the benefit of a lower rate. The calculator shows how long it takes for the monthly savings to repay the closing costs.
If the payback period is long, the refinance may not be worth it unless you plan to stay in the home well beyond that point. Compare the closing costs with the savings over the time you expect to keep the loan.
Why does the loan term matter?
A new loan can have a longer or shorter term than the current one. A longer term usually lowers the monthly payment, but it can add interest over the life of the loan, even at a lower rate. A shorter term raises the payment and often reduces the total interest.
The interest comparison in the calculator shows this trade-off. It is common to restart a long term after years of payments, which can make the monthly payment look better while the total cost rises. Check both figures before you decide.
What does a mortgage payment include?
A mortgage payment has main parts: principal and interest. The mortgage loan article on Wikipedia notes that the payments, which are typically made monthly, contain a repayment of the principal and an interest element. In the early years, most of each payment is interest.
Refinancing resets that pattern. Because the balance is starting over on a new schedule, the early years of the new loan again carry a higher share of interest. Keep that in mind when you compare the new loan to the remaining years of the current one.
When is refinancing a poor fit?
Refinancing may not suit you if you plan to sell soon, if your credit has changed significantly, or if the current loan has a favorable rate that a new loan would not beat. It can also be a poor fit if the new loan would add fees or features you do not need.
Use the calculator as one input. Compare the offers from several lenders, read each one closely, and keep the total cost in view rather than focusing only on the monthly payment.
What can the calculator not tell me?
The calculator does not know the rate you will be offered, the fees each lender charges, or the penalties on your current loan if you pay it off early. It also does not check whether you qualify for the new loan, which depends on your income, credit, and the value of the home.
Treat the result as an estimate. Ask each lender for a written loan estimate, which sets out the rate, the fees, and the total cost, and compare those documents with the figures here before you apply.
How do I compare a new loan with the current one?
Compare the monthly payment, the total interest, and the time to repay the costs of refinancing. Each figure tells you something different. The payment shows what you pay each month, the interest shows what the loan costs overall, and the payback period shows how long the change takes to pay for itself.
Compare the new loan with the remaining years of the current one, not with the full term of a new loan. That keeps the comparison fair, because a new long term can look cheaper per month while costing more over the years that remain.
What if rates fall again later?
Rates move up and down over time, so a refinance that looks right today may be overtaken by a later drop. Some borrowers wait for a meaningful decline before refinancing. Others refinance when a clear saving is available, rather than trying to time the market perfectly.
Whichever approach you take, check whether the new loan allows prepayment without a penalty. A loan with that flexibility lets you refinance again later if rates fall, without being locked into a costly arrangement.
Can I refinance if I have less equity?
Lenders usually look at how much equity you have in the home, because it affects the risk of the new loan. Less equity can mean a higher rate, a requirement for mortgage insurance, or a need to bring cash to closing. Check the lender's requirements early so you know whether the plan is realistic.
If the home's value has fallen, a refinance may still be possible, but the savings may be smaller. Run the calculator with the actual closing costs and the rate you expect to be offered, rather than the most favorable rate you have seen advertised.
What paperwork should I expect?
A refinance usually asks for proof of income, bank statements, a record of your existing mortgage, and details of your other debts. Gathering these documents before you apply shortens the process and reduces the chance of delays at closing.
Read the loan estimate and the closing disclosure carefully. They list the rate, the fees, and the total cash needed, and they should match the figures you were quoted. Ask about anything that differs before you sign.
