The refinance calculator can help plan the refinancing of a loan given various situations, and also allows the side-by-side comparison of the existing or refinanced loan.
Loan refinancing involves taking out a new loan, usually with more favorable terms, in order to pay off an old one. Refinancing is more commonly associated with mortgages or student loans. In the case that old loans are tied to collateral (assets that guarantee loans), they can be transferred to new loans. The following are a few common reasons of refinancing.
- If a borrower negotiated a loan during a period of high interest rates that have since decreased, it may be possible to refinance to a new loan with a lower rate.
- When a borrower's credit score improves, he may qualify for more favorable rates and can refinance in order to take advantage of them. This can in turn improve credit score even more by using the cash-out money to pay off existing outstanding debts.
- Borrowers can potentially pay off their existing loans faster by refinancing to shorter loan terms. Beware that this will result in higher monthly payments.
- It is possible to use loan refinances to make the switch from variable interest rates to fixed interest rates in order to lock in low rates for the remaining life of the loan, which offers protection from rising rate environments.
Refinancing mortgages can allow a person to switch between different mortgage types. For instance, if someone wanted to stop paying annual mortgage insurance premiums on their FHA loan, they can instead apply for a refinance in order to switch to a conventional loan that doesn't have mortgage insurance on house that has more than 20% equity.
Cash-out refinances, which are popular with mortgages, are refinanced loan amounts that are higher than the amount due on existing mortgages. Generally, borrowers need at least 20% equity in their property to be eligible for cash-out refinances. As with most loans, there will be fees associated with cash-out refinances, typically hundreds or thousands of dollars, which should be factored into the decision-making process. Essentially, cash-out refinancing involves turning the equity built in a home into additional money. Some borrowers use the money for home improvements. Others may use it for situations such as medical emergencies or car repairs. It can also be used it to pay off credit cards or other high interest debts. However, borrowers should be confident in their ability to pay off the refinancing, as an inability to repay can put their homes at risk.
Mortgage Refinance Costs
When refinancing mortgages, there are a number of common fees for U.S. residents that may apply, many of which are typical of mortgages. There is an input in the calculator to consider these in the subsequent calculations.
- Mortgage Application Fee—Lenders can charge about 1% of the loan amount to process mortgage applications, approved or not.
- Home Appraisal—Lenders usually require the appraisal of house value to evaluate changes in value, and whether borrowers have enough equity in order for successful application. Typically, a few hundred dollars.
- Loan Origination Fee or Mortgage Points—Normally 0-2% of loan amount, used as compensation for putting loans in place.
- Documents Preparation Fee—On average, a few hundred dollars to pay for the preparation of important documents such as the Truth-in-Lending disclosure.
- Title Search—In the amount of a few hundred dollars, this fee is paid to a title company to research court records, prior deeds, and property databases to guarantee the title as free and clear of liens.
- Recording Fee—This is a charge for handling paperwork through counties or cities, about a few hundred dollars or less.
- Flood Certification—In certain geographical areas, flood certification is necessary.
- Inspection Fee—This is a fee to evaluate the conditions or working order of plumbing, electrical, pests, roofing, HVAC, and anything else that may apply. Usually a few hundred dollars.
- Survey Fee—A survey of the property ensures proper boundary lines to prevent encroachment by adjacent properties. Existing survey maybe used. If a new survey needs to be obtained, expect to pay a few hundred dollars.
Refinancing Student Loans
There are some options to consider before refinancing student loans. If financial times get tough, consider requesting deferment or forbearance, which can postpone required payments for some time. In specific situations, student loan debt can be completely forgiven. It's important to know that when federal student loans are refinanced, they are no longer considered federal loans, but private loans, losing all the benefits of a federal loan. For more information, use the Student Loan Calculator. With that said, the student loans that are most likely to benefit from being refinanced are private student loans, and Grad PLUS and Parent Plus federal loans, which usually have higher interest rates.
Below are several cases where refinancing may not be the best option:
- Irregular or volatile income
- Student loan interest rates are already relatively low
- There is a chance of an income-based repayment plan in the future
- Currently in a career that may qualify for federal loan forgiveness such as Teacher Student Loan Forgiveness
- Credit score is lower than 650
Refinancing Car Loans
Even though not common, some people may refinance a car loan. Common objective is to increase the length of the loan to reduce the size of monthly payments. Although this gives borrowers a bigger window to pay off their car loans, it typically increases the cost of the loans because more total interest will be paid. However, beware of "upside-down" auto loans, loans in which the amount owed to a lender is more than the book value of the vehicle (a borrower is considered to be "upside-down" when they owe more on the car than what it is worth). By increasing the length of the loan, due to time increase, the car will decline more in value over the period the loan is being paid off. An owner that sells their car late in the loan period will not be able to recuperate as much money as what is owed to the lender, and additional money will be required to pay off the loan. Some car loan agreements can contain clauses for early termination, also known as prepayment penalty for paying off the loan early. These tend to be common with fixed term loans. It is important to factor these costs into the decision to refinance car loans.
Car Refinance Costs
Refinancing cars have minimal fees in comparison. There may be an administrative fee (sometimes called application fee) for terminating old loans. They typically include transfer of lien holder fees and state re-registration fees. This fee can vary depending on state and county, vehicle weight, engine horsepower, age of owner and driving record, and value of vehicle.