Refinance calculator - Should you refinance your mortgage?

Published December 19, 2016
Erik Bernhardsson
by Erik Bernhardsson

If you’re considering a mortgage refinance, you probably have one big question on your mind — how much would you save? Refinancing can save you money over the life of your mortgage by allowing you to lock a lower interest rate and reduce your monthly payments.

We made a refinance calculator1 to help you compare the terms of your current loan to your prospective new loan. Give it a try! Below, we explain the factors that affect this decision.

How to use the refinance calculator

  1. Take a moment to go to Better Mortgage’s rate tool and pick a desired loan type and rate.
  2. The loan type and rate that you choose will have “total one-time costs”, which is the cost of your refinance.
  3. In the refinance calculator below, first enter the details of your current loan.
  4. Next, enter your new rate, loan type, and cost of refinance from Better Mortgage’s rate tool.

Our mortgage refinance calculator assumes that you would be investing the money you’ve saved (we made a conservative estimate of a 3.5% return on your investment – you can decrease or increase this amount in the “advanced settings” section of the calculator (more on this below). Refinance calculator for illustrative purposes only.

Look good? Apply for your refi in just 3 minutes.

  • Get pre-approved in just 3 minutes, without affecting your credit score
  • Our online loan process means industry-leading time to close
  • Our non-commissioned Mortgage Experts are here to provide support, not sales.

More on how to maximize total wealth

The decision of whether to refinance your mortgage is multidimensional, especially if you account for maximizing total wealth. We believe it can be an oversimplification to focus on only one factor of savings (e.g., the lowest monthly payment or the total interest paid). This approach doesn’t take into account other variables in your financial picture that affect your total wealth over the course of the loan. Here are 6 other variables to account for when calculating total wealth:

1) Tax deduction of your closing costs and mortgage interest
In the tool, we’re assuming 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”.)

2) 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”.)

3) Cash flow
In the tool, 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 your mortgage even though it might save you money in the long run.

4) 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, etc.) much sooner than the full term of the loan. A recent research study2 shows that from 1990-2015, borrowers have kept their mortgages only five years on average.

5) Interest rates (not in refinance 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. Check today's rates now.

6) Unpredictability of the future
It’s impossible to predict exactly what will transpire in the future. This refinance calculator is meant to compute a reasonable estimate of total wealth over the term of your loan, but should not be viewed 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 refinancing is right for you, there’s no better time than now to apply. You can get pre-approved in just 3 minutes, without affecting your credit score. And with our 24/7 rate lock option, you can be sure you’re getting the best possible price.

  1. Mortgage refinance calculator for illustrative purposes only. Accuracy not guaranteed.

  2. Agarwal, Ben-David, and Yao (2016), forthcoming in the Journal of Financial Economics

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