Should you Refinance?

The idea of lowering mortgage payments, consolidating debt, or having extra cash on hand can be alluring. You’ll know if refinancing is your best financial move after crunching a few numbers.

Let’s get started!

Two types of refinanced mortgages: rate-and-term or cash-out

When you’re asking a lender to consider you for a mortgage refinance, you’re really asking for a brand-new mortgage that comes in one of two varieties: a rate-and-term refinance or a cash-out refinance. When you seek a rate-and-term refinance, you’re asking to borrow just enough money to pay off the principal balance of your existing mortgage, only with a better interest rate and/or loan term. This article will talk about calculations to make sure that a rate-and-term refinance works in your favor.

A cash-out refinance is designed so that you can borrow against the equity of your existing home, receive a lump sum of cash to spend as you choose, and pay back a new mortgage with a higher principal balance. To learn more details about cash-out refi loans, access the Homeowner’s Toolkit here.

Be prepared for closing costs

Whether you choose a rate-and-term refinance or a cash-out refinance, it’s important to know that your new mortgage will come with a set of closing costs. As you may remember, closing costs are the price of completing a real estate transaction, and they are in addition to the principal amount that you’re borrowing.

Closing costs = 2% to 6% of the new loan amount

Closing costs include the fees for the loan application, loan origination/underwriting, a home appraisal, credit check, title search and title insurance, and settlement with an attorney or title officer. You may be required to pay additional costs as well, such as a recording fee and courier fee. Be sure to shop around and compare loan estimates from at least three lenders to ensure that your closing costs will be as low as possible. Typical closing costs range from 2% to 6% of the new loan amount, depending on the lender and where you live.

The out-of-pocket costs of refinancing are typically quite low. Most lenders will allow homeowners to roll the closing costs into the loan itself and only will require that the home appraisal fee is paid out-of-pocket. The cost of an appraisal largely depends on the size of your home and where you live, but you can estimate that the appraisal will cost less than $1,000.

Calculating the break-event point

Given that a refinance comes with significant costs, first calculate how long it would take to offset the costs with the savings – that is, break even. This break-even calculator makes it easy to adjust all of the variables.

Here’s what you need to know for the calculator:

Current monthly payment

  • Enter only what you pay each month for principal and interest, not including any taxes or insurance.

New loan amount

  • The amount of money (principal) that you plan to borrow for your new mortgage.
  • For a rate-and-term refinance, your new loan amount would be the principal balance on your existing mortgage.
  • The new loan amount will also include your closing costs if you choose to roll these costs into the new loan.
  • Example: The Brown family purchased a $234,000 home five years ago. They made a 3.5% down payment ($8,120) and borrowed $228,810 with an interest rate of 5.0% for a 30-year mortgage. According to their most recent mortgage statement, their principal balance is down to $206,268. They have opted to refinance and pay the closing costs in cash. Their new loan amount will therefore be $206,268.
  • Example: The Smiths also have a principal balance of $206,268. They would like to refinance and pay for the closing costs using the new loan. Their estimated closing costs are 3% of the principal balance, or $6,188. The new loan amount for the Smiths will therefore be $206,268 + $6,188 = $212,456.

Rate-and-term Refinance

New loan amount = Principal balance on existing mortgage
New loan amount = Principal balance + Closing costs

Loan term

  • The duration of the loan.
  • The most common loan terms for fixed-rate mortgages are 15 and 30 years. It’s possible, however, to request that your new loan term matches the remaining term for your original mortgage.
  • Example: The Thompsons bought a new house 16 years ago using a 30-year mortgage. They want to refinance their loan and stay on track to pay off the house by the 30-year mark. They talked to their lender and arranged for their new mortgage term to last 14 years.

Closing costs

  • For this refinance calculator, enter the appraisal fee into the closing costs box since you will likely pay for this expense out-of-pocket. In addition, enter any other closing costs that you expect to pay upfront. If you plan to finance any of the closing costs into the new loan, include those costs with the new loan amount.

The point of the break-even calculations is to find out how quickly the potential savings on your new monthly payment would make up for the closing costs. Would it be a matter of months, or would it take years? Only you can decide whether the time, energy, and expense of obtaining a refinance would be worth it to you.

Get Started Today

The easiest refinance process is to stay with your current service provider, so long as they are providing customer service up to your standards.  If your current loan is being serviced by HomeLoanServ©, start the process at

If your current loan is being serviced by another service provider, contact them directly.

This article is one of the many in our Finally Home! Homeowner’s Toolkit, which was created to help homeowners on a variety of topics. The toolkit is a great guide for new homeowners as well as seasoned homeowners. It includes topics such as staying current on your mortgage, refinancing, insurance, budgeting and home maintenance.

The toolkit is free to anyone who has completed the Finally Home! Homebuyer Education course. If you are considering buying a home, check out Finally Home! today. It’s the key to successful homeownership.

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