Refinance calculator - Should you refinance your mortgage?

Published January 21, 2022
Erik Bernhardsson
by Erik Bernhardsson

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.

  1. 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%.)

  2. 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.

  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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