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Should I Refinance My Mortgage?

Should you should refinance? The answer depends on your personal and financial goals. This case study will show you how to assess refinancing options objectively, in order to make the choice that is right for you.

Refinancing Considerations

You use exactly the same approach to evaluate a mortgage for refinancing as you use to evaluate a new mortgage. Specifically, you do the following.

  • Set mortgage goals. To make the right refinancing decision, you need to first state your mortgage goals. Your mortgage goals are the objective criteria by which different refinancing options will be judged. For a review of this topic, see the lesson on setting mortgage goals.

  • Gather mortgage information. First, you need info about your current mortgage (unpaid principal, mortgage rate, remaining loan duration, etc.). Next, you need similar info about the new mortgage that you are considering. For a review of this topic, see the lesson on shopping for mortgage information.

  • Assess mortgage performance. The key output of a refinancing analysis is an objective assessment of how well the new mortgage option satisfies each mortgage goal, compared to the existing mortgage. Given this assessment, it is easy to choose the mortgage that performs best.

Once you have set mortgage goals and gathered mortgage information, this site's mortgage calculator can help you assess pros and cons of refinancing. The following case study illustrates the process.

How to Compute Savings From Mortgage Refinancing

Joe has an existing fixed-rate mortgage. The unpaid balance is $160,000, the interest rate is 7.75 percent, and there are 20 years remaining on the loan.

Joe can refinance to get a new fixed-rate mortgage with a lower interest rate. The details of both loans are described below.

Loan Attributes Current Loan New Loan
Loan term 20 years 20 years
Loan amount $160,000 $160,000
Interest rate 7.75 percent 7.00 percent
Down payment $0 $0
Points 0 1
Other costs and fees $0 $1,000

In order to refinance, the lender requires Joe to pay 1 discount point plus $1,000 in closing costs.

Suppose Joe's mortgage goal is to minimize total mortgage costs. To find out which strategy more effectively achieves his goal, Joe uses this site's mortgage calculator. His first step is to describe the analysis. Here's how.

  • Choose "Evaluate refinancing plan" from the Main Goal dropdown box of the calculator.
  • In the "Options" section, check the box for "Show amortization schedule".
  • Choose "Fixed-Rate Mortgage" as the mortgage type for both loans.

The calculator then prompts Joe for the data it needs. He enters data from the above description into the calculator. The calculator settings and data entries are shown below.

Describe the Analysis
Main goal:
Show amortization schedule
Include mortgage insurance
Include hazard insurance
Include property tax
Include prepayments
Include tax deductions
Describe the Loan
Current Loan
New Loan
Mortgage type:
Loan term (in years):
Loan amount ($):
Interest rate:
Describe the Costs Paid at Closing
Down payment ($):
Points (%):
Other costs and fees ($):

After Joe clicks the Calculate button, the calculator produces two useful results - a refinancing analysis (reproduced in the table below) and an amortization schedule.

Mortgage attributes Current loan Refinanced loan
Loan duration 20 years 20 years
Total interest expense $155,243.45 $137,711.46
Points $0 $1,600
Other loan costs $0 $1,000
Total mortgage cost $315,243.45 $300,311.46
Savings . . . $14,931.99

The refinancing analysis shows that Joe can save almost $15,000 by refinancing, over the 20-year life of the mortgage. However, the amortization schedule reveals that savings from refinancing do not begin until the 27th payment period. Until then, the current loan is the less expensive option. Therefore, if Joe plans on staying in his home for more than 27 months, he can save money by refinancing. Otherwise, he is better off with his current loan.