Comparing Refinancing Options
This calculator can be used to figure out the potential savings associated with refinancing a loan or mortgage. The calculator needs a total of seven inputs, including:
- For the original, or existing mortgage, the calculator needs the original loan amount (or value), the annual interest rate, the term of the loan (in years), and the number of months remaining before the mortgage is paid off
- For the refinancing option, the calculator needs the potential loan or mortgage value, the annual interest rate on the new loan, and the term of the loan in years
The calculator then provides the user with seven outputs:
- The balance on the original loan, which is based on the original loan value and the number of months remaining on the loan
- The monthly payments associated with the original loan and the refinancing option
- The savings, if any, on the monthly payment if the loan was refinanced
- The total of all remaining payments on the original loan
- The total of all payments to be made if the loan is refinanced
- Finally, the savings associated with refinancing the mortgage
Refinancing a Loan or Mortgage
Taking advantage of lower interest rates and pulling some equity out of a home are the two most common reasons someone might refinance an existing mortgage. While interest rates may be near historical lows, the pattern of rising and falling rates is cyclical. Refinancing a mortgage oftentimes means going through a close, so the process can be costly. That’s one way our online calculator can be used – to figure out if taking out a new mortgage will save more than it costs to go through the closing process.
Mortgages are typically the least expensive way to borrow, as measured by the interest rate on a loan. When a homeowner has sufficient equity in their home, as is the case when home values are on the rise, it may be to their advantage to refinance their mortgage if they have a need for additional funds to pay for something like a child’s college expenses or a wedding. Once again, our calculator can estimate what that might cost the homeowner in terms of monthly payments.
Interpreting the Results of Our Calculator
To understand the monetary impact of refinancing a mortgage, our calculator needs to understand the terms and conditions of the existing loan and the refinancing option. Looking at the default inputs for our calculator, the original loan had a value of 200,000 and carried an interest rate of 4.250% over a term of 30 years. After ten years, the borrower still has 20 years x 12, or 240 months remaining before the loan is repaid. Using this information, our calculator knows the unpaid balance on the original loan is 158,886. Using this information, we set up a refinancing scenario where 160,000 is borrowed over 20 years (the same time left on the original loan).
The results of the calculator show us that a loan at 3.250% lowers the borrower’s monthly payment by 76. The calculations also reveal that by switching loans, the borrower would save 18,328 over the next 20 years. Keep in mind there are three numbers that are important to study when running different scenarios. In addition to studying the total savings value, both the refinancing loan value and original mortgage balance are important to think about too. Going back to our example, we are borrowing slightly more than the remaining balance on the loan, so the actual savings in this scenario is 18,327 + (160,000 – 158,886), or 18,337 + 1,114, or 19,451.