Mortgage Refinance Calculator

Homeowners refinance their mortgages for a variety of reasons. No matter what your motivation is for refinancing, the result should leave you better off financially. Here are a few common reasons why homeowners decide to refinance a mortgage:

1. To lock in a lower interest rate and lower their monthly payments. Homeowners who have improved their credit score or lowered their debt-to-income ratio, for example, might be eligible for a better rate today if they refinance. Mortgage rates have been elevated, which has taken much of the wind out of this strategy.
2. To switch from an adjustable-rate mortgage, or ARM, to a fixed-rate loan. Borrowers who took out an ARM but plan to stay in their homes may want to refinance into a more stable, fixed-rate loan before the ARM resets to a variable rate and payments become unaffordable, or at least less predictable.
3. To pull out cash from their home’s equity. A cash-out refinance lets you tap your home’s equity by replacing your existing mortgage with a new one for a larger loan amount, taking the difference in cash.
4. To remove a borrower from the mortgage. Divorce is another reason to refinance to get your former spouse’s name off the loan. This might also apply if you bought a home with another relative or friend. The person who is refinancing the loan into his or her name will have to qualify for the new loan solely with their own income, credit and employment. Don’t forget that removing someone from a mortgage doesn’t remove them from the deed of the home, which may require filing a legal document called a quitclaim deed (check your state’s property laws for guidance).
5. To get rid of FHA mortgage insurance. For borrowers with a loan insured by the Federal Housing Administration, known as FHA loans, refinancing into a conventional mortgage can eliminate annual mortgage premium payments once you’ve reached 20 percent equity in your home.

Things to consider before refinancing

Refinancing might make sense, but the wisdom of the decision depends on many factors.

What is the break-even point? 

A key consideration when deciding whether to refinance a mortgage is when you’ll break even on your costs. The break-even point is calculated by adding up all refinancing closing costs and figuring out how many years it will take you to make up those costs with the savings from your new mortgage payment compared to your previous one. Refinancing makes more sense if you plan to stay in your home longer than the break-even point, otherwise, you could potentially lose money. 

How long do you plan to stay in your home? 

Before refinancing, you should first consider how long you plan to stay in your home. Refinancing if you plan to move in a few years doesn’t always make financial sense, even if you get a lower interest rate, because you may not have enough time to break even on closing costs. Most experts say you’ll want to be in your house at least two to five years after refinancing, but you should do your own break-even calculation to figure out what makes the most sense for you.