Refinance Calculator

What is Loan Refinancing?

Refinancing means taking out a new loan to pay off an existing one. The old debt disappears, and you start repaying the new lender on the new terms: a different interest rate, a different length, a different payment, or all three. The new loan may also be larger than the old balance, with the extra paid to you in cash.

Almost any type of debt can be refinanced, including mortgages, car loans, student loans, credit cards and personal loans. The decision always comes down to whether what you gain on the new terms outweighs the cost of getting them.

Reasons to Refinance

Lower the interest rate. This is the classic reason. When market rates fall or your credit improves, a new loan at a lower rate can cut both the monthly payment and the lifetime interest. Even a one-point drop on a large mortgage is worth hundreds of dollars a month.

Change the term. Moving to a shorter term, such as 30 years to 15, usually brings a lower rate and dramatically less total interest at the cost of a higher payment. Moving to a longer term does the opposite: it lowers the payment and frees up monthly cash flow, but you pay interest for more years, so the total cost usually rises.

Switch between fixed and adjustable rates. Borrowers with an adjustable-rate loan often refinance into a fixed rate before the first reset to lock in a predictable payment. Less commonly, someone who expects to sell soon may move to an ARM for its lower initial rate.

Take cash out. A cash-out refinance replaces the loan with a larger one and pays you the difference. Homeowners use it for renovations, college costs or to consolidate expensive debt. The money is borrowed against your home, so it should go toward something that lasts.

Consolidate debts. Rolling several high-rate balances into one lower-rate loan simplifies bills and can cut interest. It helps only if you avoid running the old balances back up.

Remove a co-borrower or mortgage insurance. Refinancing can take an ex-spouse off a loan, or move an FHA loan with lifetime mortgage insurance into a conventional loan without it once you have enough equity.

Refinance Mortgages

Mortgages are the most frequently refinanced loans, partly because their balances are so large that a small rate change matters, and partly because rates over a 30-year term are bound to move. A rate-and-term refinance changes only the rate or the length; a cash-out refinance also increases the balance; a cash-in refinance is the reverse, where you bring money to closing to shrink the loan, often to reach 80% loan-to-value and drop mortgage insurance.

Refinancing a mortgage involves nearly the same process as the original purchase loan: an application, income and credit checks, a home appraisal and a closing. Closing costs typically run 2% to 6% of the loan amount and include origination fees, appraisal, title search and insurance, recording fees and prepaid interest. Some lenders offer no-closing-cost refinances, which roll the fees into the balance or charge a slightly higher rate instead.

Points are another variable. One discount point costs 1% of the loan amount and usually buys a rate about a quarter of a percentage point lower, though the exact trade varies by lender and market. Paying points makes sense only if you keep the loan long enough for the lower payments to repay them.

The key test is the break-even point: divide the upfront cost by the monthly savings. With the calculator's defaults, the new $250,000 loan costs $6,500 in points and fees and lowers the payment from $1,800 to about $1,791, so the payment savings alone would take about 61 years to recover the cost. The refinance still pays off, though, because the current loan would run for another 23 years and 10 months; the new 20-year loan at 6% finishes almost four years sooner and saves about $77,900 in interest even after the fees.

Several practical points are worth checking before you apply:

Your credit score drives the rate. Scores of 740 and above usually get the best pricing, and a lower score can wipe out the rate benefit. Pay down card balances and avoid new credit in the months before applying.

Equity matters. Lenders generally want at least 20% equity for the best terms on a cash-out loan; conventional cash-out refinances on a primary home are usually capped at 80% loan-to-value.

Resetting the clock has a cost. If you are 10 years into a 30-year loan and refinance into a new 30-year loan, you will be paying for 40 years in total. Choosing a new term close to your remaining term keeps the comparison fair.

Taxes can change. Interest on cash-out money is deductible only if it is used to buy, build or substantially improve the home, and only for borrowers who itemize. Points on a refinance are generally deducted over the life of the loan rather than all at once.

Check for prepayment penalties on the current loan, and compare offers from several lenders using the Loan Estimate form, which lists the rate, APR and fees in a standard layout. Rate shopping within a short window, usually 14 to 45 days depending on the scoring model, counts as a single credit inquiry.

Break-even months = (points + closing costs) ÷ (old monthly payment − new monthly payment)

points

discount points paid, each 1% of the new loan amount

closing costs

lender, appraisal, title and other fees for the new loan

If you plan to keep the home or loan longer than the break-even period, the refinance pays for itself in lower payments. Also compare total interest, since stretching the term can raise lifetime cost even when the payment falls.

Refinance Student Loans

Student loan refinancing means a private lender pays off your existing education loans and issues one new private loan. Borrowers with strong credit and income can sometimes get a noticeably lower rate, especially on older private loans or on federal Grad PLUS loans that carry higher rates.

Refinancing federal loans has a major downside: the new loan is private, so you permanently lose federal protections such as income-driven repayment plans, Public Service Loan Forgiveness, generous deferment and forbearance options, and any future federal relief programs. For many borrowers, those benefits are worth more than a modest rate cut.

Federal Direct Consolidation is a different product. It combines federal loans into one federal loan with a fixed rate equal to the weighted average of the old rates, rounded up to the nearest eighth of a percent. It does not lower your rate, but it can simplify payments and make some older loans eligible for federal programs.

Refinancing private student loans has few downsides beyond the effort of shopping around. Many lenders charge no origination fee, so the comparison is mostly about rate and term.

Refinance Car Loans

Auto loans can be refinanced through banks, credit unions and online lenders. It makes most sense when your credit has improved since you bought the car, when the original loan came with a high dealer-arranged rate, or when market rates have fallen.

Because cars lose value quickly, lenders set limits on the vehicle's age, mileage and loan-to-value ratio. If you owe more than the car is worth, refinancing can be difficult. Fees are usually small, such as a title transfer fee, but extending the term to lower the payment means paying interest for longer on an asset that keeps depreciating. Ideally, keep the new term no longer than the time left on the old loan.

Refinance Credit Cards

Credit card rates are among the highest in consumer lending, often above 20% APR, so moving card debt to a cheaper form of credit can save a lot of interest.

A balance transfer card offers a promotional rate, frequently 0%, for 12 to 21 months. Most charge a transfer fee of 3% to 5% of the amount moved. The strategy works when you can pay off the balance before the promotion ends; whatever is left then accrues interest at the card's regular rate.

A debt consolidation loan is a fixed-rate personal loan used to pay off cards. It replaces a revolving balance with a set payment and payoff date, which many people find easier to stick with. Some homeowners use a home equity loan or HELOC for the same purpose; the rate is lower, but the debt becomes secured by the house.

Whichever route you choose, the savings disappear if the cards are run back up. Consider closing or putting away cards that caused the problem, while keeping older accounts open to protect the length of your credit history.

Refinance Personal Loans

Personal loans are usually unsecured and repaid over two to seven years. Refinancing one means taking a new personal loan to pay off the old, ideally at a lower rate after an improvement in credit score or income.

Watch the fees. Many personal loans charge an origination fee of 1% to 10%, deducted from the loan proceeds, and some carry prepayment penalties. Because terms are short, a fee can easily cancel a small rate reduction. Compare the APR of the new loan, which includes fees, with the rate on what you owe, and use the calculator to check the total cost over the remaining term.

Frequently asked questions

Sources

• CFPB – Refinancing your mortgage
• Federal Student Aid – Loan consolidation
• IRS Publication 936 – Home Mortgage Interest Deduction