Try our interactive tool to find out, and learn about how we aim to maximize your total wealth.
If you’re considering a home refinance, you probably have one big question on your mind — how much would you save? We made a mortgage calculator to help you compare the terms of your current loan to your prospective new loan, and arrive at a simple conclusion to maximize your total wealth. Try it now. Below we explain the factors that affect this decision.
If you don’t yet know the terms of your prospective new loan, get a rate quote from Better in just 3 seconds.
How to maximize total wealth
The decision of whether to refinance is quite complex, especially if you account for maximizing total wealth.
We believe it’s an oversimplification to focus on only one factor of savings (e.g., the lowest monthly payment or the total interest paid). Such an approach fails to account for other variables in your financial picture that affect your total wealth over the course of the loan.
Here are the variables to account for when calculating total wealth:
Tax deduction of your closing costs and mortgage interest
We assume a current and future marginal tax rate of 28%. This is used to estimate the amount by which you can reduce your taxable income over the loan term. (You can change your current and future marginal tax rates under “Show advanced settings”.)
Opportunity cost of investing your money
If you lower your monthly mortgage payment, you might choose to invest the difference in bonds or stocks. This can add up to a lot of money in the long run! We assume a post-tax investment yield of 3.5%. If you keep most of your savings in a bank account, decrease this to 0%. If you invest most of your savings in the stock market, increase it to 6%. (You can change the assumed yield under “Show advanced settings”.)
We factor in one-time, out-of-pocket closing costs as well as the adjustment to your current monthly payment. Both of these affect your cash flow. If it will be difficult to absorb these adjustments, it may not make sense to refinance even though it might save you money in the long run.
Time to break even
Out-of-pocket closing costs will cause you to lose money at the start of your loan term. But in many situations there will be a time in the future when you break even and start to save money by paying a lower interest rate. The question is whether you will stay in your mortgage long enough to reach the time when you break even.
It’s worth considering that most mortgages are terminated (due to refinancing, sale, or foreclosure) much sooner than than the full term of the loan. A recent research study1 shows that from 1990-2015, borrowers have kept their mortgages only five years on average.
Interest rates (not in calculator)
The short duration of mortgages in recent years is likely due in part to historically low interest rates. The Federal Reserve has already raised interest rates and suggested that additional increases are forthcoming. This means people getting mortgages now are more likely to keep those loans longer, as refinancing to a lower rate will likely not be an option.
Unpredictability of the future
It’s impossible to predict exactly what will transpire in the future. This calculator is meant to compute a reasonable estimate of total wealth over the term of your loan, but should not be construed as computing an exact number. There are many unpredictable factors that will affect the future of your financial picture.
Apply for your refi in just 3 minutes
If you think you might increase your total wealth by refinancing, there’s no better time than now to apply. You can get approved in just 3 minutes, without affecting your credit score.
Agarwal, Ben-David, and Yao (2016), forthcoming in the Journal of Financial Economics ↩
This article was prepared for you by Better Mortgage, a direct lender. All rights reserved. NMLS #330511 © Avex Funding Corporation dba Better Mortgage | 459 Broadway FL 5, New York, NY 10013.
Erik Bernhardsson is CTO at Better and was previously Head of Machine Learning at Spotify.