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Step-By-Step: How to Calculate Your Refinanced Mortgage Payments

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Haitham al Mhana

Haitham al Mhana is an entrepreneur, business owner, and active financial markets trader.

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Are you thinking about refinancing? Although there are many pre-built calculators out there, they don’t give you a full picture of what your new loan terms will be.

How much of a difference would a 1% interest rate reduction make? Which loan term should you choose? Also, does your home’s price impact your mortgage refinance calculation?

To fully understand how a refinance will impact your monthly bill, follow these steps to find your new payment and loan terms.

1. Study your current loan terms

Before you start your mortgage refinance calculation, identify your remaining mortgage balance and principal payments. Just as importantly, you should deduct the interest from the actual loan amount. This is because the interest rate will change after you refinance, whereas the actual principal remains the same.

To find your mortgage balance, look at your latest statement. It should highlight how much you owe and the interest on that amount.

2. Add up your closing costs and fees

Next, study how much your mortgage lender will charge you for refinancing. At times, it can be advantageous to shop around and compare offerings. In fact, some lenders offer free refinancing.

Here are a few common closing costs that you should include in your refinance calculation:

  • Early Repayment Fees: If your loan is less than three or five years old, your lender will probably require you to pay a fee when you refinance.
  • Application Fees: Lenders will spend a lot of time on reviewing your application and processing your credit check. Because of this, they may charge you additional fees.
  • Title Insurance: Even though you bought a title insurance policy when you originally bought your house, you will likely need to obtain a new one when you refinance.
  • Appraisal and Inspection Costs: Most lenders require refinancing applicants to conduct a home appraisal and inspection. This increases your refinancing expenses, but you can also lock in a lower interest rate when your property’s value appreciates (more on this to follow).

After you add up the fees, you can pay them up front and minimize your long-term interest expenses. Adding your closing costs to the overall mortgage loan amount is another option. However, doing so entails paying interest on these expenses.

To determine the approach that suits you best, add the closing costs to your refinance calculation and decide on whether the long-term interest expenses are worthwhile.

3. Account for cash-out refinancing and debt consolidation

If the value of your home increased since you initially bought it, you may be able to borrow more money than the remaining amount on your mortgage.

Homeowners typically do so for two reasons:

Cover certain expenses

Whether you need the funds to renovate the house or pay for another expense, cash-out refinancing allows you to take out a larger loan. In turn, you can deduct the borrowed amount from your mortgage balance and use the extra cash for your desired purpose.

If you plan on cashing out, add this amount to your refinance calculation. It will help you come up with your new interest rate and monthly payment.

Debt consolidation

Another option is to use the additional funds to pay off high-interest debts, such as credit cards. In other words, you can combine your debt payments and home loan under one mortgage with a relatively low rate.

To clarify, here is an example of how you can account for debt consolidation and interest savings in your refinance calculation:

A homeowner has a mortgage balance of $200,000. The interest is 3% (or $6,000). The said homeowner also has $15,000 in credit card debt, with an interest rate of 10% (or $1,500). In total, their interest expenses are $7,500.

With cash-out refinancing, the property owner can merge their home loan and credit card debt under a $210,000 mortgage with 3% in interest. As a result, the borrower reduced their interest expenses to less than $6,500.

4. Include interest rates

Once you figure out your remaining mortgage balance, estimate the closing costs, and decide on whether (or how much) you want to cash-out, you can add the interest to your refinance calculation.

This step can be complicated because several factors influence your rate. Nonetheless, here is a breakdown of what to look for that will make this process simpler and easier to understand: 

The current mortgage refinance rates

If the current mortgage refinance rates are lower than what you’re paying, you will likely cut your costs by refinancing.

To get a clear idea of how much money you may save, compare between the existing rate on your remaining mortgage balance and the interest on the refinanced loan (including the cash-out value and any closing costs that you don’t pay up front).

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Your credit score

With a good FICO score, you are more likely to attain a favorable interest rate. As a matter of fact, homeowners that have a credit score of 670 or more may secure a lower rate than the market average.

Even if your credit is below 670, you can still refinance your loan, but with less bargaining power over the interest.

When you put together your mortgage refinance calculation, estimate your expenses based on the prevalent market rates.

If your FICO score is relatively low, consider how much you would pay at an interest rate that’s 1%-1.5% higher than the current mortgage refinance rates. Homeowners with good credit, on the other hand, may lock in a rate that’s lower than the average by 1% or more.

When your mortgage refinance calculation includes a range (as opposed to a specific interest rate), your estimates will give you a clearer idea of how much you could be paying before and after refinancing.

What if I have poor credit?

At times, lenders may reject a refinance application when the borrower has bad credit. Similarly, some homeowners could get a higher than preferred interest rate because of their credit.

A bad credit score, however, shouldn’t prevent you from refinancing. Here are a few ways that can help you get approved and/or secure a desirable interest:

  • Pay down your credit card balances.
  • Find a co-signer with a strong FICO score to apply alongside you.
  • Demonstrate that you have liquid assets, such as cash or stocks. This shows the lender that you have enough money to pay your refinanced mortgage, even if your job or income change.
  • Leverage your home’s value. If the price of your house went up since you bought it, this built-up equity will help you secure favorable loan terms.

The property value

Just as with your credit score, the value of your home could help lower your interest payments. Certain modifications and improvements can increase your house’s value, such as the following examples:

  • Enhancing the landscaping and planting flowers in your yard.
  • Repainting the front door and the garage.
  • Upgrading to a more efficient heating and cooling system.
  • Replacing doors and windows when your existing ones are worn out.
  • Expanding your pool or building a new one.

Your location and zip code

Your zip code and location are equally as important as renovations. If more people and/or businesses are moving into your neighborhood, the houses in the area will probably become more expensive. This includes your home, regardless of whether or not you improved or renovated it.

After you research price trends in your zip code and estimate your house’s value, create a range of the low and high interest rates that you expect to pay. Also, consider how your current mortgage balance and credit score will come into play.

Above all, make sure to use your zip code or city/town’s interest rates as a reference. They may be different than the national or statewide average.

5. Choose your term

At this point, you should have the following information on-hand:

  • Your remaining principal balance.
  • The estimated refinancing closing costs, and if you plan to pay them up front or add them to your principal balance.
  • Whether or not you want to take cash out or consolidate debts with your mortgage.
  • An approximate range of the interest rates that you might end up paying. This is based on your credit, location, home value, and the current mortgage refinance rates on the market.

After adding up your new balance and interest rate, the next step in your refinance calculation entails choosing your loan term.

Most lenders offer 10, 15, 20, and 30-year mortgages. With a shorter term, your monthly payment will be higher, but you end up paying less interest over the lifetime of the loan. Longer mortgages come with smaller monthly payments, but you incur more interest expenses over time.

Since each approach has its own pros and cons, you should choose a loan term that suits your preferences. Some borrowers are comfortable with making bigger payments if it reduces their interest. Others might find the lower monthly bill more suitable, even if it increases their long-term rate.

Calculating the monthly payment

Once you add up your remaining balance, closing costs, and any cash you want to take out, divide that number by your new loan’s year terms. This will give you your new estimated annual payment. Divide this number by 12 to find your updated monthly bill.

Do not include the interest, we will add that in the next step.

To illustrate, here is an example of a homeowner’s refinance calculation:

  • Remaining balance: $250,000
  • Closing costs: $10,000 ($5,000 was paid up front and the other $5,000 was added to the loan amount)
  • Cash-out: $45,000

In total, the refinanced mortgage amount is $300,000. With a 30-year term, the homeowner would pay $30,000 per year ($300,000 divided by 30) or $2,500 per month (the annual payment divided by 12) before interest.

You can use the same refinance calculation to determine your principal payments on a 10, 15, or 20-year mortgage. To get a better idea of how much you may save, compare your calculations to what your current payments are.

Above all, keep in mind that most of the factors that impact your interest rate will also affect your loan term.

In other words, if your credit is lower than average, lenders may only offer you a 20 or 30-year term. This is because they view borrowers with low credit as relatively high-risk. Therefore, a lower monthly bill (which comes with a longer-term) minimizes the odds that the borrower will default or miss a payment.

Calculating your refinanced mortgage

The steps above can help you figure out whether a refinance would benefit you or not.

Now that you know how each of the closing costs, any cash out that you get, and the interest rates affect your new loan, you can play around with our refinance calculator and alter the factors that matter most to you.

If refinancing your mortgage sounds like a good way to move forward, check out Refily’s lender matching tool to learn more about your home refinance options.

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