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The One Decision That Can Make Or Break Your Financial Future
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How Much Interest Can You Save With A Mortgage Refinance?
Thinking about refinancing your mortgage?
Would you like to know how much money you will save?
While refinancing might look beneficial at first glance, there are some important facts to consider:
- Closing costs can eat into your interest savings.
- How long you plan to stay in your house affects your break even point.
The best mortgage refinance calculator will make it easy to weigh the pros and cons of refinancing. It will calculate your net refinancing savings (interest savings minus closing costs), plus it will also provide other essential information to help you make the best financial decision.
Let's start by looking at the benefits of refinancing first . . .
Benefits Of Refinancing Your Mortgage
People have different reasons for refinancing their mortgage. Most homeowners feel the only time it makes sense to refinance is if interest rates have dropped, but there are actually many other legitimate reasons to consider refinancing:
- Reduce your monthly mortgage payment – You can lower your payments either by refinancing to a lower interest rate or using a longer amortization period… or both.
- Minimize risk —Adjustable-rate mortgages can be stressful, especially when they're adjusting up. Minimize your risk by replacing your adjustable rate mortgage with a fixed-rate mortgage. This locks in current interest rates for the life of the mortgage and protects you from rising interest rates in the future.
- Get cash – Cash-out refinancing allows you to receive a lump-sum payment at closing. Any amount refinanced over and above the amount required to pay off your previous mortgages (plus transaction costs) will get returned to you. You can use these leftover funds to pay off your other debts, build investment accounts, or put money toward other financial needs like college expenses for the kids. However, make sure to check with your tax advisor for potential affects on your tax situation first.
- Reduce your loan term – Refinancing gives you an opportunity to change your loan term. For those people who earn more or have extra cash each month you might consider refinancing to shorten the duration of your loan term. Refinancing allows you to pay off your mortgage loan faster, reinvest the money saved from reduced interest costs over the life of the loan, and enjoy the benefits of living a debt-free life. Keep in mind, however, you can always pay off your mortgage early without refinancing (assuming no prepayment penalty) by simply adding to your monthly payment using our Mortgage Payoff Calculator.
Although there are many benefits to refinancing, there are also some things to watch out for. . .
Downsides Of Refinancing Your Mortgage
Before making a decision to refinance, you should be aware that refinancing isn't always in your best interest.
If your reason for refinancing is to consolidate debts, remember that you are just converting your unsecured loans to a secured loan. Your new mortgage payments may be higher thus increasing your risk of failing to make the monthly repayments. If you fail to pay, you will eventually end up losing your home.
Related: Why you need a wealth plan, not a financial plan.
Another potential risk is that property values could decrease and you could end up owing more on your home than its value.
A refinance may also lead to spending more money instead of saving money. For example, a typical refinancing may include any or all of the following fees:
- Title searches
- Title insurance
- Realty transfer taxes
- Legal services
- Document Preparation
- Messenger or delivery services
- Document duplication
- And more . . . .
Also, if you move out of your home before you break-even on your refinancing costs, the refinance would've been a net expense instead of a savings.
Another thing to watch out for is to count the costs of private mortgage insurance (PMI) should the refinance put you in a situation where your loan-to-value ratio is more than 80 percent of the appraised value.
In short, it doesn't always necessarily make financial sense to refinance your mortgage just because interest rates have dropped. Use this mortgage refinance calculator to crunch the numbers and consider all the facts for your personal situation before making a decision.
Refinancing has many potential advantages but requires you to carefully consider the details of your situation first before pulling the trigger.
Remember there's no such thing as a “no closing cost” mortgage. You're going to pay substantial expenses to refinance, so make sure the benefits outweigh the costs.
This Best Mortgage Refinance Calculator can give you an excellent idea whether or not the numbers make sense without giving you a math headache. I hope this calculator fits that and helps you.
Mortgage Refinance Calculator Terms & Definitions
- Mortgage – A debt instrument secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.
- Loan Term – The length of time it takes to pay off a loan – in this case, a mortgage.
- Interest Rate – The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
- Principal Amount – Denoting an original sum of money lent.
- Refinance – Replacing an older loan with a new loan – typically offering better terms.
- Amortization – The paying off of debt in regular installments over a period of time.
- Mortgage Payment – The action or process of paying your mortgage lender – in this case on a monthly basis.
- Closing (or Refinancing) Costs – The expenses, over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.
- Percentage Points – In real estate mortgages, the initial fee charged by the lender, with each point being equal to 1% of the amount of the loan.
Related Mortgage Calculators:
- Mortgage Payment Calculator With Amortization Schedule: How much will my monthly mortgage payment be? Includes taxes, insurance, PMI, and printable amortization schedule for handy reference.
- Mortgage Payoff Calculator: How much extra payment should I make each month to pay off my mortgage by a specific date (and how much interest will I save)?
- Bi-Weekly Mortgage Calculator: How much interest will I save paying my mortgage biweekly instead of monthly? How much more can I save if add an extra payment?
- Mortgage Balance Calculator: What is my mortgage balance given the number of payments I've already made (or still need to make)?
- Interest Only Mortgage Calculator: How much lower will my payment be on an interest only mortgage compared to a conventional principal and interest mortgage?
- Second Mortgage Calculator – Consolidate Savings With Refinance: How much will I save consolidating my first and second mortgages into a new first mortgage?
- Rent vs. Buy Calculator: Should I rent or buy? What's the better deal?
- Mortgage Affordability Calculator: How much house can I afford if I paid the same amount in mortgage as I pay in rent?
- ARM Mortgage Calculator: How does an adjustable-rate mortgage (ARM) compare to a fixed-rate mortgage over the life of the loan (as opposed to just the teaser payment)?
- Balloon Mortgage Calculator: How much will I owe (balloon) at the end of the payment period?
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As a financial expert with a deep understanding of mortgage refinancing and wealth planning, I can confidently guide you through the complexities of this crucial financial decision. My expertise stems from extensive experience in the finance industry, staying updated on market trends, and providing personalized advice to individuals seeking to optimize their financial well-being.
Now, let's delve into the concepts mentioned in the article about mortgage refinancing:
Mortgage Refinancing Basics:
- A debt instrument secured by specified real estate, obliging the borrower to repay with predetermined payments.
2. Loan Term:
- The duration taken to repay a loan, in this context, the time it takes to pay off a mortgage.
3. Interest Rate:
- The percentage charged by a lender on the principal for using their assets.
4. Principal Amount:
- The original sum of money lent.
- Replacing an existing loan with a new one, typically offering better terms.
- Paying off debt in regular installments over time.
7. Mortgage Payment:
- The process of paying the mortgage lender, usually on a monthly basis.
8. Closing (or Refinancing) Costs:
- Extra expenses in addition to the property price incurred to complete a real estate transaction.
9. Percentage Points:
- In mortgages, an initial fee charged by the lender, with each point equal to 1% of the loan amount.
Mortgage Refinancing Decision-Making:
1. Benefits of Refinancing:
- Lower monthly payments by reducing interest rates or extending the loan term.
- Minimizing risk by switching from adjustable-rate to fixed-rate mortgages.
- Accessing cash through cash-out refinancing.
- Shortening the loan term to pay off the mortgage faster.
2. Downsides of Refinancing:
- Consolidating debts may increase the risk, converting unsecured to secured loans.
- Potential decrease in property values, leading to owing more than the home's worth.
- Additional fees like surveys, appraisals, title searches, and more.
- Costs of private mortgage insurance (PMI) if the loan-to-value ratio exceeds 80%.
- Closing costs impact interest savings; calculate net refinancing savings.
- Duration in the house affects the break-even point.
- Use a mortgage refinance calculator to analyze personal financial situations.
4. Final Thoughts:
- Refinancing has advantages but requires careful consideration.
- No "no closing cost" mortgage; substantial expenses are involved.
- The Best Mortgage Refinance Calculator helps evaluate the financial viability.
Additional Mortgage Calculators:
- Mortgage Payment Calculator With Amortization Schedule: Estimates monthly mortgage payments, including taxes, insurance, and PMI.
- Mortgage Payoff Calculator: Determines extra payments to pay off the mortgage by a specific date, along with interest savings.
- Bi-Weekly Mortgage Calculator: Compares interest savings with biweekly payments instead of monthly.
- Mortgage Balance Calculator: Calculates the mortgage balance based on payments made.
- Interest Only Mortgage Calculator: Compares payments on interest-only and principal and interest mortgages.
- Second Mortgage Calculator: Assesses savings by consolidating first and second mortgages.
- Rent vs. Buy Calculator: Compares the financial implications of renting vs. buying a home.
- Mortgage Affordability Calculator: Determines the affordable house price based on mortgage payments.
- ARM Mortgage Calculator: Compares adjustable-rate and fixed-rate mortgages over the loan term.
- Balloon Mortgage Calculator: Estimates the amount owed at the end of a balloon payment period.
In conclusion, before making the pivotal decision to refinance your mortgage, use these tools and considerations to ensure a well-informed and financially sound choice for your future.