How to use a refinance mortgage calculator

Still thinking about refinancing your home loan? With interest rates remaining low, it can be a tough decision, especially when you got what you thought was a pretty good rate a few years ago. So, should you stick with what you have or go with lower rates and eat the costs that go with refinancing? A refinance calculator can help you make the right decision.

Some financial experts will advise you to not consider refinancing unless your new mortgage rate will be at least 2 percent lower than your current rate. But I’ve financed homes at high interest rates as well as lower and refinanced under both conditions, and I know that the same advice doesn’t work in every situation. There’s a good chance the 2 percent rule may not be good advice for you.

First steps

How do you decide?

• First, take the mortgage rate calculator and feed in the amount of your new loan and your new interest rate. Your new monthly payment will pop up.
• Second, figure out how much you will be paying in closing costs and other fees associated with refinancing — those costs will cut into any savings you’d get by refinancing.
• Take the total of how much it will cost you to refinance, then divide it by the amount you’ll save each month by refinancing to a lower interest rate. The answer will be how many months it’ll take you to recover your costs. From that point on, each month you’ll save the difference between your old mortgage and the new one.

How it works out

Getting the idea? Here’s an example. Suppose you want to refinance your home at a lower interest rate and will save $100 a month in interest. Sounds great, huh? But wait. It’s going to cost you $4,000 in fees to refinance.

That means it’ll take you 40 months to recoup your refinancing costs. If you’re OK with that, fine. Like I said, after you make back your refinancing costs, you’ll be gaining $100 a month — and if you’ve got 20 years left on your loan, you’ll save $24,000. That’s a serious amount of cash!

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