The best case, stable and worst case interest rate scenarios have been evaluated by the mortgage calculator. While this refinance could save you up to $72,855 over the life of the loan, it is far from certain whether it will actually benefit you. For the best case (lowest) interest rate scenario the refinance could cost you $29,280. Depending on interest rates your monthly payment could increase up to $402 or decrease up to $738. The earliest break-even for this refinance is 12 years 3 months. If you expect to sell your home before then this refinance will not benefit you.
Refinance Summary - Stable Index Rate
| Principal Balance | $4,500 |
| Interest Rate | 2.000% |
Monthly Payment
(Principal and Interest) | $402 |
| # of Remaining Monthly Payments | 0 |
Total Remaining Payments
(Principal and Interest) | $34,441 |
| Total Remaining Interest | $29,941 |
Refinance Interest-Only to Fixed Rate Mortgage
Do you have an adjustable rate interest-only mortage? Do you want to protect yourself against rising interest rates? How do you know when the benefits of a refinance from an interest-only ARM to a fixed rate mortgage are greater than the costs? Let's review this example.
The homeowner has paid 5 years of a 30 year interest-only ARM for $120,000 with a starting interest rate of 4%. The index rate and margin are 1% and 3.5% respectively. The interest rate is both fixed and interest-only for the first 10 years. At the first adjustment the payment will be fully amortizing and mortgage rates may change a maximum of 1%. Subsequent interest rates adjustment may change rates up to 1% every 12 months. The minimum interest rate for the mortgage is 4% while the maximum is 18%.
Use the refinance calculator to see how a refinance could benefit you.
Refinance Calculator
Refinance Calculator Examples
- Break-Even
- The break-even point is the amount of time it will take for your mortgage savings to equal the amount you paid up front. The break-even point for your refinance is the amount of time it will take for your refinance savings to equal the cost of your refinance. The break-even for paying discount points is the amount of time it will take for your savings to equal the amount you paid for points
- Cash Out
- The amount of money the borrower will receive after closing the loan. This is more common for refinances than for purchases.
- Floor Rate
- Floor rate is the minimum interest rate for an adjustable rate mortgage (ARM).
- Income Tax Rate
- Your marginal income tax rate is the rate at which any additional dollars of your income would be taxed at.
- Index Rate
- Rate Adjustment on ARMs are based on the index rate, the margin, the adjustment schedule, interest rate caps, and floor rate specified in your loan documents. Index rates change over time. They should be published and widely available. Common indexes used for setting mortgage rates have include the Prime Rate, Libor (London Interbank Offer Rate) and U.S. Treasury Rates.
- Interest
- The portion of your mortgage payment that is due to the interest rate being applied to the principal balance. The Total Interest for a mortgage is the sum of all interest paid over the life of a loan.
- Interest Only
- Interest-only mortgages allow borrowers to make interest-only payments for a specific period of time. Required mortgage payments can be significantly lower during the interest-only period since the borrower is not required to pay down the principal balance during that time. However, the borrower is taking on more risk since the balance is not being paid down. Interest-Only Mortgages come in a wide variety of types, including both fixed and adjustable rate mortgages.
- Interest Rate
- The percentage of the principal balance of your mortgage that determines how much interest you must pay. The interest rate on your mortgage may change or remain the same depending on the type of loan you have.
- Interest Rate Adjustments
- The interest rate changes on an adjustable rate mortage (ARM) during adjustment periods specified in your loan documents. Your interest rate may have a fixed period where it does not change followed by adjustements on a regularly scheduled basis. For example, the interest rate on a mortgage could be fixed for 2 years followed by adjustments every 6 months.
- Interest Rate Caps
- Limits how much your interest rate can be increased during each adjustment period for an ARM. The cap for the first adjustment period may be different than the cap on subsequent adjustments. There also may be a maximim overall cap on interest rate increases during the life of your loan.
- Investment Earnings
- Your investment earnings are the average annual percentage rate you expect to earn on your investments.
- Loan Amount
- The initial principal balance or your mortgage at closing.
- Margin
- When an ARM adjusts the margin is added to the index rate to help determine your interest rate. Interest rate caps and the floor rate for your mortgage may limit how much your actual interest rate changes. The margin typically is fixed for the life of the loan. It should be clearly specified in your loan documents.
- Payment Shock
- Occurs when the required minimum payment for a mortgage increases significantly. This can occur on adjustable rate mortgage when interest rates rise sharply, on interest-only mortgages when the interest-only period ends, and on balloon mortgages when the balloon payment is due.
- Principal
- The portion of your mortgage payment that is used to pay down the current balance of your mortgage. The principal balance represents how much you owe on the mortgage.
- Refinance Fees
- All closing costs for the new mortgage, including any discount points, loan origination fees, appraisal fees, title insurance, etc...
- Refinance Savings/(Loss)
- The refinance savings/(loss) estimates how a refinance will impact your financially.
- Term
- The amortization term is one of the key factors that determine your required mortgage payment. Your required mortgage payment for fully amortizing mortgages is the amount that would result in the mortgage being closest to being paid off by the end of the amortization term. Longer amortization terms result in lower required mortgage payments for fully amortizating mortgages, all other things being equal.