Mortgage Refinance Decisions Made Easier With Calculators

When the housing and mortgage markets regain stability, potential borrowers will need to follow time-tested rules for refinancing wisely.

Should You Refinance?

You know that reducing your interest rate could save you several thousand dollars over a decade. Refinancing also can allow you to change the term of the loan, such as converting a 30-year into a 15-year mortgage. By paying more in principal each month, you pay less in total interest, build equity more rapidly and pay off the mortgage in much less time.

The Federal Reserve Board offers this example:

  • A $200,000, 30-year, 6-percent, fixed-rate mortgage would have a monthly payment of $1,199 and amount to $231,640 paid in interest over the life of the loan.
  • That same amount financed over 15 years at 5.5 percent would have a payment of $1,634 and total interest of $94,120.
  • Thus you would reduce your interest expense by $137,520, or $9,168 for each of the 15 years.

This example only applies, however, if you have not owned your home for many years. Lenders structure mortgages so that, in the early years, most of your payment applies to the mortgage interest. With each year of amortization, a larger portion of the payment is applied to the principal.

Amortization Schedule Vital in Evaluating Refinance

For a 30-year loan similar to the loan in the previous example, you would pay a little more than $2,000 toward the principal in the first year compared with nearly $14,000 in year 30. The longer that you have owned your home, the less advantage you would gain because refinancing starts the amortization clock over again: Instead of continuing to build equity in your home, you would return to making mortgage payments devoted mostly to paying off the interest.

With a refinance calculator, you can quickly determine whether refinancing will improve your bottom line by reducing your monthly payment amount, paying a lower interest rate, cutting loan fees, or reducing total interest. By entering your principal loan balance and your current payment and interest rates, you can compare your mortgage with mortgage quotes from other lenders.

A loan amortization calculator can show you the amount of principal and interest that you will pay on a mortgage. You only need to enter the loan amount, the annual percentage rate of interest and the repayment period, and the calculator will create a chart or a table of the amortization schedule.

Taking advantage of these tools can save time in making these critical decisions.