Refinance Calculator

Use this free refinance calculator to figure out how much money you could save every month by refinancing.

What is Loan Refinancing?

Loan refinancing involves replacing an existing loan with a new one to secure better terms, such as a lower interest rate, adjusted loan duration, or modified payment structure. This financial strategy enables borrowers to optimize their debt obligations in alignment with current market conditions or personal financial goals.

When you refinance, you may reduce your monthly payments, decrease the total interest paid over the life of the loan, or access equity built up in your assets. It’s a common practice in mortgage lending but is also applicable to other types of loans, including auto loans and personal loans.

Refinance Calculator Key Terms Explanation

Original Loan Amount

The original loan amount refers to the initial sum of money borrowed from a lender to purchase an asset, such as a home or vehicle. This principal amount is the basis upon which interest is calculated and does not include any interest, fees, or additional charges that may accrue over time.

To understand your original loan amount is crucial, as it influences your monthly payments and the total cost of the loan over its term. Accurate knowledge of this figure is essential when considering refinancing options, as it helps you determine the remaining balance and potential savings.

Original Loan Term

The original loan term denotes the agreed-upon duration over which the borrower is scheduled to repay the loan in full. Typically expressed in years, this period dictates the number of payments to be made and influences the size of each installment.

For instance, a longer loan term generally results in lower monthly payments but may lead to paying more interest over time, whereas a shorter term usually means higher monthly payments with less interest accrued. When evaluating refinancing, reassessing the loan term can be a strategic move to align debt obligations with current financial capabilities and objectives.

Time Remaining

Time remaining refers to the period left until the existing loan is fully paid off, considering the original term and the payments already made. This metric is vital for borrowers contemplating refinancing, as it affects the potential benefits and costs associated with obtaining a new loan.

If you calculate the time remaining, you can compare your current loan’s trajectory with possible refinancing options to determine if adjusting the loan term or interest rate would be advantageous.

Current Interest Rate

The current interest rate is the percentage charged on the outstanding principal by the lender, reflecting the cost of borrowing. This rate significantly impacts the total amount paid over the life of the loan and the size of monthly payments. Interest rates can be fixed, remaining constant throughout the loan term, or variable, fluctuating based on market conditions.

When considering refinancing, comparing your existing interest rate with prevailing market rates is essential. Securing a lower rate through refinancing can lead to substantial savings and more manageable monthly payments, enhancing overall financial health.

New Loan Term

The new loan term in refinancing refers to the duration over which the refinanced loan will be repaid. Borrowers may opt for a term that extends, shortens, or matches the remaining period of the original loan, depending on their financial goals. When you choose a longer term, you can reduce monthly payments but may increase the total interest paid, while a shorter term often results in higher monthly payments with less interest over time. Careful consideration of the new loan term is crucial, as it directly affects repayment schedules and interest costs.

New Interest Rate

The new interest rate is the percentage applied to the refinanced loan’s principal, determining the cost of borrowing under the new terms. This rate may differ from the original loan’s interest rate due to changes in market conditions, the borrower’s creditworthiness, or the lender’s policies. When you secure a lower new interest rate through refinancing, it can decrease your monthly payments and reduce the total interest paid over the loan’s lifespan. However, it’s better to consider associated refinancing costs to ensure that the new rate offers a net financial benefit.

Points

The points refer to upfront fees paid to the lender at closing, with each point equating to 1% of the loan amount. When you pay points, it can lower your loan’s interest rate, a practice known as “buying down the rate.” This strategy may be beneficial for you if you plan to keep the loan for an extended period, as the initial cost may be offset by the interest savings over time. However, it’s crucial to calculate the break-even point—the time it takes for the savings to surpass the cost of the points—to determine if this approach aligns with one’s financial objectives.

Closing Costs

Closing costs encompass various fees and expenses incurred during the finalization of a loan refinancing. These may include application fees, appraisal costs, title insurance, and attorney fees, among others. Normally ranging from 3% to 6% of the loan amount, closing costs can significantly impact the overall benefit of refinancing.

Borrowers need to obtain a detailed estimate of these expenses upfront and consider them when evaluating the potential savings from a new loan. In some cases, lenders may offer options to roll closing costs into the loan balance, though this may affect the interest rate and total repayment amount.

Cash-Out Amount

A cash-out amount refers to the portion of home equity that a borrower chooses to convert into cash during a refinancing transaction. In a cash-out refinance, the new loan exceeds the remaining balance of the existing mortgage, and the difference is disbursed to the borrower in cash.

This financial tool can be utilized for various purposes, such as home improvements, debt consolidation, or other significant expenses. While accessing home equity can provide liquidity, it’s important to consider the implications, including potential changes to the loan term, interest rate, and the increased debt secured by the property.

Current Monthly Payment

The current monthly payment is the amount a borrower is supposed to pay each month toward their existing loan, comprising both principal and interest components. Depending on the loan agreement, this payment may also include portions allocated for property taxes and insurance. Knowing the breakdown of your current monthly payment is essential when assessing the potential benefits of refinancing.

6 Reasons to Refinance

1. Secure a Lower Interest Rate

One of the biggest motivators for refinancing is the potential to lower interest rates. A lower rate means you’ll pay less interest throughout the loan, which saves you thousands of dollars.

Even a small reduction in interest rates makes a difference, lowering your monthly payments and freeing up funds for other financial goals. With favorable market conditions, refinancing at the right time can be a smart move for long-term financial

2. Reduce Monthly Payments

If the monthly payments stretch your budget too small, refinancing may provide relief by extending the loan term or securing a good rate. A longer repayment period may distribute the loan balance over more months, making each installment more manageable. This is especially helpful when you want to improve your cash flow and create more breathing room in your finances.

3. Pay Off Your Loan Sooner

If you are focused on paying debt faster, refinancing into a shorter-term loan can be a strategic choice. Although the monthly payments may increase, the long-term savings on your interest can be higher. Paying off a loan sooner also helps you to build equity more quickly, putting you in a stronger financial position for future investments.

4. Access Home Equity for Major Expenses

Cash-out refinances allow homeowners who have accrued equity in their homes to access it. With the difference available as cash, this enables them to take out a new loan that is greater than the amount owed on their existing mortgage.

In addition to offering a lower interest rate than other borrowing choices, refinancing can be an affordable way to obtain the money you need for home upgrades, education, or the consolidation of high-interest debt.

5. Switch to a More Suitable Loan Type

Refinancing offers flexibility to transition into a loan that better suits a borrower’s financial outlook. Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, for example, provides predictability and safeguards against potential rate hikes. Conversely, someone with a fixed-rate mortgage might decide for an ARM if they plan to sell the home within a few years and want to take advantage of initial lower rates.

6. Remove Private Mortgage Insurance (PMI)

Homeowners who initially put down less than 20% on their mortgage are often required to pay private mortgage insurance (PMI). However, if property values have increased, refinancing can eliminate this additional expense. Removing PMI reduces monthly costs, allowing homeowners to allocate those funds toward savings or other financial priorities.

Is Refinancing the Right Move?

Before considering refinancing, it’s necessary to balance the advantages and disadvantages. It is important to take into account factors, including closing costs, loan conditions, and long-term financial objectives. Speak with a mortgage specialist to get clarification and make sure refinancing fits your financial objectives.