Mortgage refinance calculator

Mortgage refinancing is when you replace your current mortgage with a new one. Typically, the idea is to save money with better loan terms or to take out equity, for example.

Refinancing a mortgage can have many benefits. Here are some of the most common reasons worth considering.

To get a lower interest rate

Getting a lower interest rate is the most common reason homeowners refinance, according to Bankrate. Longer loans tend to have higher interest rates because they’re considered riskier, says Forbes. Securing a shorter loan term can help cut down costs.

To consolidate high-interest rate debt

Homeowners may refinance to help pay off other debts. This is called “cash-out refinancing,” according to Bankrate. It replaces your current loan with a larger one. That way, you can take out a portion of the equity that’s been growing on your home and use it toward most kinds of expenses. For instance, home renovations, paying off liens and more.

To eliminate mortgage insurance

Private mortgage insurance (PMI) is typically enforced by lenders when homeowners can’t put a minimum of 20% down, says Time Magazine. It helps protect the lender in case the homeowner can’t make payments.

Refinancing could remove PMI and lower monthly costs, according to Forbes, by using your increased equity toward your down payment. But you want to make sure that you can get a lower interest rate for it to be worth it. A higher interest rate may be more than the savings from removing PMI.

Refinancing can present numerous financial opportunities. But it also requires a measured approach. While there are many good reasons to refinance a mortgage, not all reasons are created equal. Here are some of the bad ones.

To save money for a new house

The cost of refinancing typically comes out to about 2% to 3% of the total loan amount, according to U.S. News. It can take years to recoup the costs and buying a house before then may not benefit you even if you now pay less monthly.

To get a loan with a longer term

Longer loan terms could lower your monthly payments. But you may end up paying more in interest, warns Business Insider, on top of making payments for a longer amount of time.

It may, however, be worthwhile for retirees with a steady income for budgeting purposes, says Bankrate.

To pay for lifestyle luxuries

Taking out home equity to consolidate debt may be sound in reason. But doing so to pay for high-ticket toys or new clothes may not be, warns Forbes. Equity is hard-earned and paying off debt has tremendous benefits. It can help increase your credit score and save you more in the long run. Using it toward spending spree doesn’t offer returns. Whatever you decide, make sure to weigh the costs.

To pay off your home faster

You may not want to refinance for a shorter loan term to pay off your house faster, says Bankrate. Funds that could’ve been used toward retirement or college savings, or other investments could get held up in your house.

This mortgage refinance calculator helps you determine whether it’s a good time to refinance your home. It calculates information from four areas: your current loan terms, your new loan terms, your property and your individual information. You should also consider how long you plan to stay in the home. As a general rule of thumb, refinancing may make sense if you can lower your monthly payments and cover the closing costs within about three years. If you plan on moving soon, refinancing may not be the best decision for you.

Remember, refinancing a mortgage may cost about 2% to 3% of the total loan amount. The average closing cost is around $5,000, but it ultimately depends on your loan amount, according to Freddie Mac. If, for instance, your loan is for $400,000, and the cost to refinance is 2% of that amount – you’d be paying $8,000.

You can refinance as often as you want, according to Fox Business. But be aware that many mortgage companies require you to have a certain amount of equity on your home before you can take that first step.

Also, your lender may have a six-month waiting period before you can refinance with them again. Aside from that, however, you can essentially refinance whenever you think it’s right to do so.