At some point, you want to achieve some major life goal, for example, to buy a house. Considering that quite a few people can make this purchase with cash, the majority decide on mortgages. These are large, long-term loans that generally have lower interest rates (mostly fixed) and relatively favorable terms. But your credit score is better than when you’ve got the mortgage, so why not take advantage of it?
Or maybe you took a personal loan with a favorable variable interest rate and a repayment period of several years. At that time, a lower interest rate on long-term arrangements meant lower monthly installments, which could leave a lot of money in your pocket. But what if market conditions change and the interest rate starts to go up?
In any case, you may realize that refinancing is a good idea at some point. You run onto a favorable refinance deal, or your situation has changed so that you could benefit from different lending conditions. Of course, refinancing is not a universally applicable option, so it’s important to make a good estimate to see if this move is worth it. You can check refinansieringkalkulator.net/ and use the handy refinance calculator for more accurate calculations.
What Is a Refinance Calculator?
It’s an online tool that looks simple but does a very complex job. It’s an algorithm that uses the parameters you give it to help you evaluate whether refinancing is a good move. Of course, that’s only an estimate, so you should take it only as guidance.
Refinance calculator needs details of the current loan and the new arrangement with which you plan to refinance the existing one. These are repayment periods, interest, the current installment you’re paying, and the new installment you would eventually pay. The result is the potential savings that would be achieved with a new loan, which speaks volumes about the profitability of refinancing.
When it comes to mortgages, online calculators also estimate the break-even point. That’s the moment during the mortgage lifetime when you start to realize savings, that is, the moment when the savings achieved so far finally cover the costs of refinancing (closing the mortgage).
If you were to carry out this analysis all alone, there would likely be some mistakes, especially with interest rates, since their calculation is quite complex. Loans with variable interest are especially tricky, as it’s impossible to predict the APR movement in the following period, especially in the long term. The refinance calculator will certainly do a better job, even though it doesn’t factor in the unpredictability of the market either.
Benefits of Refinance Calculators
Nowadays, people rely a lot on technology and artificial intelligence, so it’s no wonder they use online calculators a lot. For starters, these handy tools can estimate refinancing costs in just a few seconds. You’d probably take a while to do that step-by-step.
Plus, these algorithms surely “know” better than you how to compute interest and monthly installments, which most people do in the wrong way. These tools also factor in closing costs, which are of great importance in deciding whether and when refinancing is worthwhile.
Finally, refinancing calculators include prepayment points for the new loan. At most lenders, each point equals one percent of your mortgage balance. That’s how much you can pay in advance and thus reduce interest costs. Lenders can also roll this expense in your new loan. That only initially increases the principal, but in the long term, it drops the interest rate – one point brings a rate drop of 0.25%, allowing you to save a bunch over the loan lifetime.
Why Lenders Offer Online Calculators
When looking for affordable refinancing, you’ll check the offers of several lenders. So you visit their websites looking for loan details. On their home pages, there are usually calculators with pre-inserted parameters of a refinance loan. You just have to enter the details of the loan you want to refinance.
This seemingly simple procedure is an important detail when deciding on taking out a loan. By giving you the option to use handy loan calculators, lenders discreetly draw your attention to their offers, which can be further customized to your needs and capabilities.
When Does Refinancing Make Sense?
Simply put, refinancing makes sense if it provides certain benefits. It can be saving money, changing loan tenure, or bringing extra cash. For example, if your financial situation has improved, and you now have more money at your disposal, you can refinance your current loan with another one that offers a shorter repayment term. Thus you will get rid of the debt as soon as possible and even save on interest.
At what point you decide to refinance will depend on many factors. If it’s a mortgage, what will influence the decision are the interest type, the mortgage length, how much you plan to stay in the house, and the already mentioned closing costs and the period you need to recoup them.
You Can Get a Better Interest Rate
The largest part of the loan cost makes interest. The longer the loan tenure, the lower the interest rate you can get, but the overall expense is higher because you will be paying more installments. So on a mortgage of, let’s say, $300,000 with a fixed interest rate of 6% over 30 years, the monthly installment will be around $1,800, which seems bearable. But if you look at the long term, you’ll pay over $130,000 in interest.
After ten years of paying off this mortgage, you’ve only returned about $50,000 of the borrowed amount. The amount you have left to repay is about $250,000 over the next 20 years. But, you have the option to refinance this debt with a new loan that has an interest rate of 4.5%. That lowers the monthly installment by over 200 dollars or a total of about $50,000 over the loan lifetime.
You Can Shorten Loan Tenure
One of the most important is the repayment length, that is, how much of the loan you have repaid so far. But why that matters? because you must know when you really start paying off the loan, not interest.
As you know, your monthly installment consists of principal and interest, of which the interest portion is the largest at the beginning. This share drops during the loan lifetime, so you pay off more and more principal, that is, what you actually borrowed.
If we look only at that, you’re aware that refinancing at the very beginning of the loan repayment doesn’t make much sense unless you find an extremely good deal, for example, with an interest rate lower by two or three points. As these are rare situations, you should decide on refinancing after some time, when you’ve already paid off a significant part of the principal.
In the meantime, your financial situation may have improved, and you can apply for favorable refinance loans. For example, you want to cut the remaining mortgage payment from 20 to 10 years. In the meantime, the value of your real estate has increased significantly, and now the equity you own is worth almost as much as the initial loan. So you can cash it in with interest of only a few percent for a period of ten years, pay off the mortgage, and even have extra money for whatever you want.
You Plan to Stay in House for a Long Time
Mortgages are mostly loans with fixed interest, meaning installments are predictable even in the long term. That makes them attractive for borrowers who always know how much they have to pay and can plan their budget. Such an arrangement is sustainable if you want to live in your house for a long time, minimize any risk of loan interest, and enjoy predictability.
So if there’s a trend of falling interest rates, you should take advantage of it. But you must know when it’s better to switch your fixed rate for a variable one or look for another fixed arrangement with a lower rate.
In most cases, it pays off to refinance the mortgage by replacing the current fixed loan with another one. But whether the saving is realistic and profitable will be shown through the break-even point. You can easily calculate it by dividing the closing costs by the annual savings you would achieve with a new loan. Or you can simply use a refinance calculator.
In any case, you get a number that shows how many years it takes to reach the break-even point. If you plan to live in the house longer than that, refinancing with a new fixed interest rate will be a good move, as it will bring significant savings.
You Don’t Plan to Stay in Your House
As said, refinancing makes sense if you don’t plan to move out soon. But what if you’re thinking of moving in the next couple of years? That changes the situation a bit. Refinancing is still a good move if global interest rates drop, and you can get a loan with APR lower by one or more percent.
But if you don’t plan to live in your house long enough to reach a break-even point, you shouldn’t strive for fixed refinance loans. Instead, you can enjoy more benefits from variable rates (provided global interest rates go down).
Refinancing is not something you should rush about, especially if it’s a mortgage. As we talk about a larger amount, you have to evaluate this decision and all costs involved. Refinancing calculators can be of great help in determining whether to refinance, when, and how.