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Should I Refinance My Mortgage?

Refinancing refers to paying off an existing loan with the proceeds from a new loan, using the same property as collateral. Should you refinance? This lesson will help you decide.

Why Refinance?

Some common reasons to refinance include the following:

  • Lower total lifetime interest expense.
  • Reduce monthly mortgage.
  • Pay off the mortgage sooner.
  • Take cash out of home equity.
  • Switch from an unpredictable ARM to a predictable fixed-rate mortgage.

Given the benefits of refinancing, why not refinance? Sadly, refinancing is not free. Settlement costs can amount to thousands of dollars.

Should I Refinance?

In order to decide whether to refinance, you need to weigh the benefits of refinancing against the costs of refinancing. Use the free mortgage calculator to conduct this analysis.

  • The calculator features a clear, user-friendly interface.
  • The calculator prompts you for the input needed to quantify the costs and benefits of refinancing.
  • Calculations occur automatically and instantaneously, behind the scenes.
  • Based on your input, the calculator creates a summary report that clearly presents key findings.

If the benefits of refinancing outweigh the costs, refinance. If not, keep your current mortgage.

A Mortgage Refinancing Case Study

In this section, we present a case study to show how to evaluate the costs and benefits of 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. He wonders which strategy more effectively achieves this goal - refinancing or keeping his current mortgage. To find out, Joe uses this site's mortgage calculator. His first step is to describe the analysis he want to conduct. 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, and 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. 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.