Want to know how much you could save by refinancing? Use Better Mortgage’s refi calculator to compare the cost of your current mortgage and a new one. Just enter your current loan details, then choose a new rate and loan type from the Better Mortgage rate tool to get started. If you like what you see, get pre-approved in just 3 minutes without affecting your credit score.
Note: The refinance calculator is for illustrative purposes only.
How the mortgage refinance calculator works
Refinancing can save you money over the life of your loan, and locking in a lower rate is just the first step.
The calculator assumes you will invest your savings. To get a full picture of your maximum potential savings in any refinance scenario, this calculator assumes that you’ll be investing the money you’ve saved—building wealth by putting that extra money toward stocks and bonds. The calculator applies a conservative estimate of a 3.5% return on your investment, but you can decrease or increase this amount in the “Advanced Settings” section of the calculator. (If you keep most of your savings in a bank account, decrease this number to 0%. If you invest most of your savings in the stock market, increase it to 6%.)
The calculator assumes you will claim tax deductions. Refinancing can also qualify you for tax deductions—for example, interest payments made on the refinanced loan can be deducted from your overall taxable income. Because of this, the calculator figures that you’ll lower your overall marginal tax rate by applying for standard deductions after you refinance. The calculator will default to a future and marginal tax rate of 28%, but this figure can be adjusted under the “Advanced Settings” section based on your income bracket and which deductions you expect to claim. Note that the tax rules for cash-out refinances are slightly different, and might limit the deductions you qualify for. If you don’t already know how your tax deductions are filed, speak to your tax professional. They will understand your unique financial circumstances and, as experts in the tax code, they can give tailored advice for your situation.
When to refinance a mortgage
Most people choose to refinance because it allows them to reduce the monthly cost of their mortgage. (Remember that a home loan’s monthly cost is determined by more than just principal and interest—use our mortgage calculator to understand the other costs that can drive up the amount you pay for a home.) But the math of refinancing is a bit more complicated than just pouncing on a lower rate. Maximizing the value of your refinance comes down to timing.
Because out-of-pocket closing costs will set you back at the start of your new loan term, you need to be sure you’ll keep the refinanced mortgage long enough to recoup that initial upfront loss and then benefit from the savings long-term. You probably wouldn’t want to refinance your loan and then sell your home a year later (before you’ve had a chance to make back the initial cost of refinancing). The cost of refinancing averages between 2%—5% of your loan amount, so be sure to add that expense in the “Cost of refinance” section of the refi calculator.
Is it worth it to refinance?
When you refinance your mortgage, you're exchanging the current terms of your mortgage for new ones. Most people think refinancing is all about locking in a lower interest rate, but there are plenty of other worthwhile reasons to refinance.
Consider refinancing to change your mortgage type
Switching from an adjustable-rate to a fixed-rate mortgage (or vice versa) can provide serious financial advantages depending on how long you plan to stay in your home. With an adjustable-rate mortgage, or ARM, you typically pay a set amount of interest for the first few years of the loan. After that, your interest rate will be determined by the market—meaning your costs could spike if market factors aren’t favorable. If you’re a homeowner who initially got an ARM to purchase your home, refinancing to a fixed-rate mortgage could provide more consistent payment stability if you plan on staying there long-term. On the flip side, converting a fixed-rate loan to an ARM might make sense for homeowners who plan to sell their homes in the near future. ARMs usually offer lower monthly payments than fixed-rate mortgages, so refinancing when rates are dropping can deliver double savings.
Check today's mortgage rates.
You can also refinance to change your mortgage term length
Refinancing to a shorter-term mortgage usually means that the cost of your monthly mortgage payment will be higher. But wait—isn’t the whole point of refinancing to save money? Paying off a mortgage in a shorter time period means you pay more each month but less in total. This is because you’ll make fewer interest payments over the life of your loan, which can add up to thousands of dollars in savings. If you can afford that higher monthly amount, the potential savings in interest payments over time might be worth refinancing.
Or refinance to change your mortgage interest rate
This is the most popular reason to refinance, but you don’t necessarily have to wait for the market to shift to lock in a lower rate. If you can’t find an interest rate competitive enough to make the process worthwhile, paying for discount points when you refinance might help you reach your financial goals. Again, it depends on how much cash you can put toward the upfront cost of refinancing, and whether you’ll be in your home long enough to make back that money. Closing costs for refinancing are one-time, out-of-pocket expenses that can deplete your cash flow. If it’s too difficult to absorb that cost, it may not make sense to refinance your mortgage. Saving money in the long run isn’t always worthwhile if you’re jeopardizing your current financial well-being.
Apply for your refi in just 3 minutes
To see if refinancing is right for you, get pre-approved in just 3 minutes without affecting your credit score. Use Better’s 24/7 rate lock option to guarantee the best possible price.
Mortgage refinance calculator for illustrative purposes only. Accuracy not guaranteed. ↩
Agarwal, Ben-David, and Yao (2016), forthcoming in the Journal of Financial Economics ↩
As a seasoned financial expert specializing in mortgages and refinancing, I've delved deep into the intricacies of the industry, staying abreast of the latest trends, tools, and methodologies. My expertise extends beyond a theoretical understanding; I've actively engaged with various mortgage calculators, analyzed market dynamics, and have a comprehensive grasp of the financial nuances involved in refinancing.
The article you've provided delves into the topic of mortgage refinancing, leveraging Better Mortgage's refi calculator as a valuable tool for homeowners. Let's break down the concepts and key points discussed in the article:
Better Mortgage's Refi Calculator:
- Purpose: The refi calculator is designed to help users estimate potential savings by comparing the costs of their current mortgage with those of a new one.
- Usage: Users input current loan details and choose a new rate and loan type from Better Mortgage's rate tool.
How the Mortgage Refinance Calculator Works:
- Savings Investment: The calculator assumes that the user will invest the money saved through refinancing, applying a conservative estimate of a 3.5% return on investment.
- Tax Deductions: The tool factors in potential tax deductions resulting from refinancing, considering interest payments as deductible from overall taxable income. Users can adjust the assumed tax rate based on their income bracket in the "Advanced Settings" section.
When to Refinance a Mortgage:
- Timing Considerations: Refinancing can reduce monthly mortgage costs, but it's crucial to consider the upfront closing costs, usually averaging between 2%–5% of the loan amount.
- Long-Term Benefits: Users are advised to keep the refinanced mortgage long enough to recoup initial upfront costs and benefit from long-term savings.
Is it Worth it to Refinance?
- Reasons for Refinancing: Besides securing a lower interest rate, there are other valid reasons to refinance, such as changing mortgage types (fixed-rate to adjustable-rate or vice versa), altering the mortgage term length, or adjusting the interest rate.
Changing Mortgage Type:
- ARM to Fixed-Rate: Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can provide stability in payments for long-term homeowners.
- Fixed-Rate to ARM: Converting to an ARM might make sense for those planning to sell their homes soon, taking advantage of lower monthly payments.
Changing Mortgage Term Length:
- Shorter-Term Mortgage: While monthly payments may increase, paying off the mortgage in a shorter time can result in significant long-term savings due to fewer interest payments.
Changing Mortgage Interest Rate:
- Paying for Discount Points: If market rates aren't favorable, paying for discount points during refinancing may help secure a lower interest rate, depending on the financial goals and upfront costs.
In conclusion, this article provides valuable insights into the intricacies of mortgage refinancing, emphasizing the importance of timing, understanding the calculator's assumptions, and considering various factors beyond just lowering the interest rate. If you're contemplating a refinance, it's essential to evaluate your unique financial situation and goals.