This resource is part of the Innovative Funding Services (IFS) educational collection on refinancing.
Is Home Loan Refinancing Right for You?
Mortgage refinancing is the process of replacing your home loan with a new one of better terms for you. Refinancing your mortgage may help you decrease your total interest charges, lower your monthly payment, pull cash out of the equity in your home, and more.
Use this refinancing calculator to see how much you could potentially save with mortgage refinancing. Simply plug in the details of your current home loan and a replacement loan in the first box and press “Calculate.”
Have you considered refinancing your vehicle loan? Auto loan refinancing is generally a simpler process than mortgage refinancing and may help you reduce your auto loan monthly payments, lower your interest rate, or remove someone from your car loan. Apply with IFS today to see how much auto refinancing may save you.
Mortgage Refinance Calculator:
|New Mortgage Results|
|Upfront Cost Break Even||
|Finance Charge Savings||
1. Your actual APR will be subject to terms and conditions and will be based upon factors like your income, your home’s loan-to-value ratio, your credit score, and other items. Discuss the details with any mortgage lenders with which you apply.
Understanding the Calculator
This mortgage refinance calculator shows you the effect that refinancing your home loan may have on your finances. It assumes that you are looking to refinance a fixed rate mortgage to a new fixed rate mortgage.
Refinancing your home may help you lower your interest rate, decrease your monthly payments, pull cash out of the equity in your home, switch to a fixed rate or adjustable rate mortgage (ARM), remove a co-signer from your loan, and more.
How the Calculator Works
This calculator takes the input from your current auto loan and replacement loan and shows you the comparison. It assumes that the balance on your current mortgage will be the amount you refinance, as is often the case. However, it does not ask for this input, because once you supply the “Months You’ve Held the Loan” input it calculates your original loan’s balance assuming you made your payments as scheduled.
Similarly, the calculator does not need you to supply both your current mortgage’s monthly payment and interest rate, because by supplying one along with your original loan term and amount it automatically calculates the other.
You will notice that the term length inputs take a number in months, not years. By offering input in months, especially the “Months You’ve Held the Loan” input, the calculator allows you to perform more accurate, mid-year estimations. Simply multiply your term length in years by 12 to get the length in months. For instance, 30 years is 360 months [360 months = 30 years x 12 months].
Interpreting the Results
The results section of the calculator highlights how mortgage refinance can have different short term and long term effects on a person’s finances.
Payments vs. Finance Charges: Refinancing will not necessarily reduce your monthly payments and the total cost of your loan in every situation. While lowering your interest rate is always good, if you increase your loan term at the same time, then you may increase your finance charge, or the total dollar amount you pay loan over the life of your mortgage. However, extending your loan term will almost always decrease your monthly payments, sometimes even if your interest rate increases. You can use the calculator above to see how different interest rates and loan terms for a replacement loan may affect you.
The Effect of Closing Costs: Your closing costs also affect your total loan cost. If you finance your closing costs, you do not have to pay them upfront, but you do have to pay interest on the amount you borrow. Alternatively, if you pay closing costs out-of-pocket, you will not have to pay interest charges on that expense. Examples of closing costs you may face include origination fees, appraisal fees, title fees, and credit reporting fees.
Your mortgage lender may consider certain closing costs to not be part of the cost of your loan (e.g. potentially an appraisal fee). Those closing costs will not be reflected in the finance charge and APR listed on your loan agreement. So, when reviewing your loan offer, you should add any closing costs that your lender does not consider part of your finance charge to your finance charge to get the total cost of your loan in the long run.
The calculator above assumes that all the closing costs you enter are part of your finance charge. Always ask your lender which closing costs are and are not part of your finance charge.
The Estimated APR: Your Estimated APR in the results section shows you the effective interest rate of your new loan if you treat your closing costs like interest charges. APR stands for “Annual Percentage Rate” and is a figure you will always see on loan agreements. It tells you your total costs of borrowing as a percentage of your total of payments at a year rate. It will be larger than your interest rate, also known as the note rate, and serves as a tool for understanding your true cost of borrowing.
The Break Even Point: The Upfront Cost “Break Even” Point in the results section above tells you how many months it will take you to recoup the cost of any out-of-pocket closing costs that are part of your finance charge from a lower monthly payment. If you do not plan to stay in your home at least until you break even, then you will lose money from refinancing.
For example, if you refinance your home so that you will save $100 on your monthly payments but have to pay $2,000 out-of-pocket, then it will take you 20 months [20 = $2,000 / $100] to break even. In this case, if you do not plan to stay in your home for at least this length of time, then you will lose money by refinancing.
If you do not pay any closing costs upfront, then your break even point will say 0 months, because you will not be spending cash out-of-pocket to refinance.
In the case that your monthly payment increases from refinancing, you will never break even on any upfront closing costs you pay. However, never breaking even on upfront closing does not imply that you will lose money in the long run from refinancing. You may actually save on your mortgage’s finance charge if your payment increases, especially if it increases because you reduce your loan term length. So, never breaking even is not necessarily a bad thing if you save in the long run and plan to stay in your home long enough to benefit from those long-term savings.
The Mortgage Refinance Process
Mortgage refinancing is generally a time-consuming and difficult process. It usually requires you to apply with multiple mortgage lenders so that you can compare offers, provide extensive financial documentation, have your house appraised, sign many documents, and more. Learn more about how mortgage refinance works here.
Have You Considered Auto Loan Refinancing?
Auto loan refinancing is generally less time-consuming than mortgage refinancing and can help you lower your monthly payments, decrease your interest rate, or remove someone from your loan.
We have all the resources you need to learn how auto refinancing works and when may be a good time for you to refinance. Visit the pages below to get started!
Auto Loan Basics:
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