Refinance Calculator Guide & When to Refinance Your Mortgage
Refinancing replaces your current mortgage with a new loan, potentially lowering rates, reducing payments, or changing terms. Understanding break-even points and costs helps determine if refinancing makes financial sense.
What is Refinancing
Mortgage refinancing involves taking out a new loan to pay off your existing mortgage. The new loan replaces the old one, with potentially different terms, rates, or loan amounts.
Borrowers refinance to lower interest rates, reduce monthly payments, shorten loan terms, convert adjustable-rate mortgages to fixed rates, or access home equity through cash-out refinancing.
When to Refinance
Interest Rates Drop
The general rule suggests refinancing when rates drop 0.75% to 1.0% below your current rate. Smaller rate reductions may still be worthwhile depending on loan size and remaining term.
Credit Score Improves
Higher credit scores qualify for better rates. If your score has increased 40+ points since origination, refinancing may provide significantly lower rates.
Remove PMI
Once home equity reaches 20%, refinancing to a conventional loan eliminates private mortgage insurance. This is especially beneficial for FHA loans with lifetime MIP.
Change Loan Term
Switching from 30-year to 15-year terms accelerates equity building and reduces total interest. Conversely, extending to 30 years lowers monthly payments.
Refinancing Costs
Refinancing involves closing costs similar to original mortgage origination. Total costs typically range from 2% to 5% of loan amount.
| Cost Type | Typical Range |
|---|---|
| Application Fee | $75 - $300 |
| Appraisal | $300 - $700 |
| Title Search & Insurance | $700 - $1,500 |
| Origination Fee | 0.5% - 1.5% of loan |
| Attorney Fees | $500 - $1,000 |
| Credit Report | $25 - $50 |
Break-Even Analysis
The break-even point shows how long it takes for monthly savings to recover closing costs. Calculate by dividing total closing costs by monthly payment reduction.
Example Break-Even Calculation
- Current monthly payment: $2,200
- New monthly payment: $1,950
- Monthly savings: $250
- Closing costs: $6,000
- Break-even: $6,000 ÷ $250 = 24 months
If you plan to stay in the home more than 24 months, refinancing saves money over time.
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Types of Refinancing
Rate-and-Term Refinance
Changes interest rate, loan term, or both without altering loan amount. Most common refinance type for lowering payments or accelerating payoff.
Cash-Out Refinance
Replaces existing mortgage with larger loan, providing cash difference to borrower. Used for home improvements, debt consolidation, or major expenses. Requires sufficient equity.
Cash-In Refinance
Borrower pays down principal during refinancing to reach lower LTV, eliminate PMI, or qualify for better rates. Less common but strategically valuable.
Streamline Refinance
Simplified refinancing for FHA, VA, or USDA loans with reduced documentation and no appraisal. Faster processing with lower costs. Only available for same loan type.
Refinancing Process
- Check Credit and Finances: Review credit reports, calculate debt-to-income ratio, and gather financial documents.
- Compare Lenders: Shop multiple lenders for best rates and terms. Request loan estimates within 14-day period to minimize credit impact.
- Lock Rate: Secure interest rate when favorable. Rate locks typically last 30-60 days.
- Submit Application: Complete full application with chosen lender. Provide employment verification, income documentation, and asset statements.
- Home Appraisal: Lender orders appraisal to confirm property value and loan-to-value ratio.
- Underwriting: Lender reviews application, documentation, and appraisal. May request additional information.
- Closing: Sign final documents and pay closing costs. New loan funds and pays off existing mortgage.
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Frequently Asked Questions
How often can I refinance my mortgage?
No legal limit exists on refinancing frequency. However, lenders typically require 6-12 months of payment history. Frequent refinancing incurs repeated closing costs that may outweigh benefits.
Does refinancing hurt my credit score?
Refinancing causes a temporary 5-10 point drop from credit inquiries and new account. Scores typically recover within months. Multiple rate shopping inquiries within 14-45 days count as single inquiry.
Can I refinance with bad credit?
Possible but challenging. Most conventional refinances require 620 minimum credit score. FHA streamline refinancing accepts lower scores for existing FHA borrowers. Rates will be higher with lower credit.
Should I refinance to pay off my mortgage faster?
Refinancing to shorter term (30-year to 15-year) saves substantial interest but increases monthly payments. Only pursue if budget comfortably accommodates higher payments.
What is a no-closing-cost refinance?
Lender covers closing costs by charging slightly higher interest rate or adding costs to loan balance. Useful if you lack cash for closing but increases total interest paid.