Refinance Calculator

When should I refinance my mortgage?

Refinancing makes sense when it saves you money or achieves other financial goals. Here are the key considerations:

Good Reasons to Refinance

Interest Rate Rule of Thumb

Traditional Rule: Refinance when rates drop 1% below your current rate

Modern Reality: Refinance when rates drop 0.5-0.75% below current rate

• Lower closing costs today
• Break-even happens faster
• Even small rate drops can save significantly

Example: $300,000 Mortgage, 25 Years Remaining

Current Rate: 6.5% ($2,047/month)

Other Factors Beyond Rate

Consider refinancing even with smaller rate drop if:

• Need to remove PMI
• Want to switch from ARM to fixed rate
• Need to lower monthly payment (extending term)
• Want to pay off mortgage faster (shortening term)
• Need cash for home improvements or debt consolidation

When NOT to Refinance

Don't refinance if:

• ❌ Planning to move within 2-3 years (won't recoup costs)
• ❌ Rate drop is small (less than 0.5%) and closing costs are high
• ❌ You'll extend term significantly (restart 30 years when you have 15 left)
• ❌ Credit score has dropped significantly
• ❌ Home value has declined (may not qualify)

What is the break-even point?

The break-even point is when your monthly savings equal the refinancing costs. After this point, you're actually saving money.

Break-Even Formula

Break-Even (months) = Total Refinancing Costs ÷ Monthly Savings

Example Calculation

Scenario:

• Current mortgage: $250,000 at 6.0% ($1,499/month)
• Refinance to: 4.5% ($1,267/month)
• Monthly savings: $232
• Refinancing costs: $5,000

Break-Even: $5,000 ÷ $232 = 22 months (1.8 years)

Interpretation: If you stay in the home longer than 22 months, you save money!

Break-Even Analysis Table

$5,000 refinancing costs at different savings levels:

Beyond Break-Even: Total Savings

Same example over different time periods:

Factors That Affect Break-Even

Longer break-even (worse):

• Higher closing costs
• Smaller rate reduction
• Higher loan balance

Shorter break-even (better):

• Lower closing costs
• Larger rate reduction
• Lower loan balance (less to save on)

How Long Will You Stay?

Planning questions:

• Do you plan to move within 3-5 years?
• Is your family growing/shrinking?
• Job stability in this location?
• Like the neighborhood long-term?

Rule of Thumb: Only refinance if break-even is less than half the time you plan to stay

Example: Planning to stay 6+ years → Break-even should be under 3 years

Should I cash-out refinance or take a home equity loan?

Both options tap into home equity, but they work differently. Choose based on your situation and current mortgage rate.

Cash-Out Refinance

How it works: Replace mortgage with larger loan, take difference in cash

Example:

• Current mortgage: $200,000
• Home value: $400,000
• New mortgage: $280,000
• Cash to you: $80,000

Home Equity Loan / HELOC

How it works: Second mortgage using home equity as collateral

Example:

• Keep existing mortgage: $200,000
• New home equity loan: $80,000
• Total debt: $280,000
• Cash to you: $80,000

Detailed Comparison

Decision Framework

Choose Cash-Out Refinance if:

• ✅ Your current mortgage rate is high (greater than 5%)
• ✅ You can get a lower rate than current mortgage
• ✅ Want one simple payment
• ✅ Need large amount ($50,000+)
• ✅ Prefer fixed rate security

Choose Home Equity Loan if:

• ✅ Your current mortgage rate is excellent (less than 4%)
• ✅ Don't want to lose great rate
• ✅ Need moderate amount ($20,000-$100,000)
• ✅ Prefer fixed rate for equity portion
• ✅ Don't mind two payments

Choose HELOC if:

• ✅ Your current mortgage rate is excellent
• ✅ Need flexible access over time
• ✅ Unsure of exact amount needed
• ✅ Planning home renovations (draw as needed)
• ✅ Can handle variable rates

Example Comparison

Scenario: Need $50,000, current $250,000 mortgage at 3.5%, new rate 6.0%

Option A: Cash-Out Refinance

• New mortgage: $300,000 at 6.0%
• Payment: $1,799
• Cost: Higher rate on entire balance

Option B: Home Equity Loan

• Keep $250,000 mortgage at 3.5% ($1,123)
• New $50,000 loan at 7.0% ($465)
• Total payment: $1,588
• Savings: $211/month vs. cash-out

Winner: Home equity loan saves $2,532/year because you keep the low 3.5% rate!

Tax Considerations

Home equity debt: Interest is tax-deductible only if used for home improvements

• ✅ Deductible: Renovate kitchen, add room, new roof
• ❌ Not deductible: Pay off credit cards, buy car, vacation

Limits: Deduct interest on up to $750,000 total mortgage debt ($1M if mortgage before 12/15/2017)

Does refinancing restart my 30-year mortgage term?

Yes, refinancing typically resets the clock unless you choose a shorter term. This is a critical consideration!

The Term Reset Problem

Example: You've been paying a 30-year mortgage for 5 years

Current situation:

• 25 years remaining
• Paid 5 years
• On track to pay off in 25 more years

Refinance to new 30-year:

• 30 years remaining
• Back to square one
• Won't pay off for 30 more years (total 35 years!)

Impact of Term Reset

$300,000 mortgage at 5%, paid 5 years, refinance to 4%:

Better Alternatives

Strategy 1: Match Your Remaining Term

If you have 22 years left, refinance to a 20-year or 25-year loan

• Stay on or ahead of schedule
• Don't extend repayment unnecessarily

Strategy 2: Shorten Your Term

Use refinancing as opportunity to pay off faster

• Lower rate + shorter term = huge interest savings
• Example: 25 years remaining → refinance to 20-year
• May have similar payment due to lower rate

Strategy 3: Keep Payment the Same

Calculate term that keeps payment identical:

• If paying $1,500/month now
• Refinance to whatever term gives you ~$1,500/month at new rate
• Likely shorter than your remaining term due to lower rate!

Example: Smart Refinancing

Current: $250,000, 6.0%, 25 years left, $1,610/month Refinance options at 4.5%:

Recommendation: Choose the 20-year or 23-year option

• Pay off faster
• Save $50,000-70,000 in interest
• Payment is nearly the same or lower

Don't Fall Into the Trap

Warning: Banks often push 30-year refinances

• Lower payment = easier to sell
• More interest for them over time
• But terrible for your long-term wealth

Be Proactive: Ask for term that matches or beats your current payoff date

What are the costs of refinancing?

Refinancing isn't free. Understanding costs helps you decide if it's worth it and negotiate better deals.

Typical Refinancing Costs

Total range: 2-6% of loan amount

Example: $200,000 loan = $4,000 - $12,000 in costs

Itemized Closing Costs

Example: $300,000 Refinance Cost Breakdown

Ways to Reduce Costs

1. Shop Around

• Get quotes from 3-5 lenders
• Compare Loan Estimates (required within 3 days)
• Rates and fees vary significantly

2. Negotiate Fees

• Origination fees are negotiable
• Application fees can often be waived
• Ask about fee discounts

3. No-Closing-Cost Refinance

• Lender pays closing costs
• You accept slightly higher interest rate (0.125-0.25%)
• Makes sense if you won't stay long-term

Example: $5,000 closing costs at 4.5% vs. no costs at 4.75%

Short-term (5 years): No-cost wins Long-term (10+ years): Paying costs wins

4. Skip the Appraisal

• Some lenders offer appraisal waivers
• Saves $300-$600
• Based on automated valuation models
• Only if home value is clearly sufficient

5. Use Your Current Lender

• May offer streamlined refinance
• Reduced documentation
• Lower costs
• Faster process

Hidden Costs to Watch For

Prepayment Penalty (on current loan):

• Check if your current mortgage has one
• Some loans charge 1-2% to pay off early
• Add this to refinancing costs

Property Tax Escrow:

• May need to refund/restart escrow
• Temporary double payment situation
• Plan for cash flow impact

Lost Tax Deduction (first year):

• New loan = restart mortgage interest deduction
• May have lower deduction in year of refinance

Is It Worth the Cost?

Calculate: Closing costs ÷ monthly savings = break-even months

Example: $5,000 costs, $200/month savings = 25 months break-even

Rule: Refinance if break-even is less than half the time you'll stay in home