Whether you’re looking to refinance to a lower interest rate or shorten the length of your mortgage, refinancing could save you money every month — and thousands of dollars over the life of the loan. Use NerdWallet’s free refinance calculator to determine whether you should refinance your mortgage.
Nerd tip: It typically makes sense to refinance your mortgage if you’re planning to stay in your home longer than the break-even period.
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Using the NerdWallet Refinance Calculator
It’s probably a good idea to bookmark this page. If you’re thinking about refinancing your mortgage — or have already begun the process — chances are you’ll be giving this refinance calculator a good workout. You’ll have to compare offers from lenders, maybe consider different types of mortgages and the number of years to payoff — perhaps even a cash-out option.
Let’s put this thing to work.
First, you’ll tackle the Current Loan Details column:
Original Mortgage Amount – This is easy enough: the amount of your home loan when you first took it out.
Current Interest Rate – You may want to double check your most recent mortgage statement for this one, especially if you have a variable-rate loan.
Original Loan Term – Did you take out a 30-year mortgage or a 15 — or something else? Now be careful, this number is not how many years you have left on the loan, but rather the original number of years the loan was for.
Balance Left on Mortgage – You’ll definitely need to check your statement for this one: the remaining balance due on your home loan.
Years Remaining on Current Loan – How long you have left to pay on your loan.
Now, we move to the New Loan Details column:
Cash Out Amount – Thinking of taking some cash out of your home’s equity and adding that to your new refinance balance? Well, this is where you can play with some numbers to see how that will affect your monthly payment and the interest you’ll pay over the loan term. Take a minute or two to read about a cash-out refinancing below before you make any final decisions.
New Loan Term – This is a big decision. Are you going to extend the term of your loan back out to a full 15 or 30 years? That will add a pile of interest that’s going to have to be paid all over again. Your house is worth the same, but now you owe a bunch more on it. Or, pay off the loan in the same time you now have left, or less. That’s a wealth-building strategy.
New Interest Rate – If you don’t have any firm offers from lenders yet, or if you’d like to apply for a loan to get an offer, you can check the NerdWallet mortgage rate tool to find out what current interest rates look like.
Closing Costs – Once you apply for a loan, lenders will provide you the details of the closing costs you’ll have to pay. If you’re not that far along yet, you can put in 3% to 6% of the loan amount as an estimate.
Understanding the outputs
This calculator is so easy, there’s not even a “submit” button to push. The results are tabulated and updated with every input.
The left column shows how much your refinancing scenario will save you, broken down by monthly and lifetime savings, with estimates of your closing costs and break-even point. The breakeven is the number of months you’ll have to make the new monthly payment before you recoup the costs of refinancing.
The right column provides a monthly payment comparison, showing your new loan amount, your original monthly payment and your new (hopefully significantly lower) monthly payment.
Of course, these are all estimates, but the NerdWallet Refinance Calculator can provide a lot of information for just a little effort. It’s an important part of the mortgage refinance process.
Speaking of which, let’s drill down for a little more detail about home loan refinancing.
Why should you consider a mortgage refinance?
Generally, if you plan to stay in your home for a while and have a long-term loan, refinancing can be an attractive prospect. Refinancing a mortgage makes sense under certain circumstances:
- Refinance for a lower interest rate
Lowering your mortgage interest rate can reduce your monthly payment if the repayment term (duration) remains the same. However, keep in mind that a refinance can carry fees ranging from 3% to 6% of the loan balance due.
Mortgage refinancing for a lower rate can make a lot of sense, especially if your credit score has improved. For example: You had a credit score in the “fair” range, say around 640-659, when you got your mortgage, but you’ve made all of your payments on time and your credit score has improved to 750 or higher. You might qualify for a significantly lower mortgage rate today, if interest rates haven’t risen much since your first mortgage closing.
You might want to check your credit score and history before you go any further.
- Refinance to switch from an adjustable-rate mortgage to a fixed rate
An adjustable-rate mortgage typically comes with an initial period of a steady interest rate and then resets to a floating rate for the rest of the loan. This is different from fixed-rate mortgages, which have the same interest rate for the entire loan.
For example, with a 5/1 ARM, the loan’s interest rate would remain the same for the first five years and adjust annually after that. If you keep the ARM after that initial rate period ends and interest rates rise, your payments could jump.
Converting to a fixed mortgage from an ARM can be a wise financial decision, especially if you plan to stay in your home long-term. For example, if you have a 5/1 ARM, you could complete a refinance by the end of the fifth year and lock in a steady rate with a 30-year fixed-rate mortgage.
There are times when choosing or sticking with an ARM makes sense. The interest rate during the fixed-rate period is typically much lower than on other mortgages. An ARM could also work if you plan on living in your home for only a short period of time or if you sell the home before the fixed-rate period ends.
- Refinance to get rid of private mortgage insurance
If you buy a home with less than 20% down, you typically are required to pay private mortgage insurance, which helps to protect the lender in case you default on the loan.
PMI can be quite expensive; annual premiums can cost between 0.5% and 1.5% of the mortgage. For example, a $200,000 loan with 1% mortgage insurance premiums would cost the homeowner $2,000 a year, or $166.66 per month.
Sometimes, homeowners are able to cancel mortgage insurance once the balance on the mortgage falls below 80% of the value of the home. However, loans insured by the Federal Housing Administration require mortgage insurance for the entire life of the loan.
If your loan doesn’t allow you to cancel, you may still be able to get rid of PMI once you have 20% equity in your home by refinancing. You still should go over all the costs to make sure the savings outweigh the costs.
Traditional versus cash-out refinance
There are two types of refinances. One is a regular refinance, where the interest rate, and perhaps the repayment term, of the loan changes. The other is called a cash-out refinancing.
With a cash-out refinancing you are given a new loan, which is larger than the balance remaining on your mortgage. The extra money is paid directly to you. However, your interest rate will typically be higher than in a standard mortgage refinance.
Although a cash-out refinancing may be a tempting way to consolidate credit card debts and other higher-interest loans at the lower interest rate on a mortgage, you should think carefully before proceeding: You’ll owe more on your house, and the consequences of defaulting on your mortgage are far worse than defaulting on credit card payments: You could lose your home.
And stretching out payment of your consumer debt over 15 to 30 years is not a wealth-building strategy.
The costs of refinancing your mortgage
Since you’re considering refinancing, you’ve been through a mortgage procedure before. Refinancing your loan will be much the same as applying for the original loan. There will be closing costs to pay, and they may even be higher than the fees you paid the first time around, especially if the value of your home has risen or your creditworthiness has taken a slight turn for the worse.
Also, you may be getting a discount on property taxes if your home hasn’t been assessed for a while; refinancing may trigger a new assessment, which might increase your tax bill.
Some loans also have prepayment penalties: If you repay your loan ahead of schedule, you might have to pay an additional charge. If you have such a clause in your home loan, the penalty period is usually five years or less. Watch out for these fine-print charges that might cost you a significant chunk of money and consider waiting until the prepayment period ends before refinancing.
The bottom line
Refinancing a mortgage takes a lot of time and serious consideration. Just because you see a lower interest rate doesn’t necessarily mean that you should grab it.
Rather than simply focusing on reducing your monthly payment, it’s wiser to refinance when you can save money with a lower interest rate, without extending the payoff term.