We've been asked thousands of times: "Is it better to pay closing costs out of pocket, finance them into the loan amount, or trade them for a higher interest rate?" There's no one simple answer, since each refinance choice has its own benefits and total costs over time. One may be more or less expensive depending upon how long you'll hold onto the mortgage.
The TriRefi calculator allows you to run the numbers for a Traditional Refinance, a Low-Cash-Out Refinance and a No-Cost Refinance so you can determine which is best for you. Fill in the information once and instantly compare the costs and savings.
The Traditional Refinance calculator assumes you pay the closing costs out of pocket today. While you get the benefit of the lower interest rate, you have to overcome your outlay today before you realize any benefit. This is your breakeven point, and in order to get any real savings, you'll need to stay in the new mortgage beyond this point. We assume that the fee for refinancing will be approximately 2 points (2 percent of the loan amount) but if it is different, you can change it; just type the expected dollar amount into the yellow box.
You pay the fees once, and then they are gone.
The "Low-Cash-Out Refinance" calculation (LCOR) uses the Estimated Costs you plugged into the Traditional Calculator. However, instead of you paying them today out-of-pocket, it adds them into the loan amount you are borrowing. This is a popular choice for homeowners who have some equity available and don't want to (or can't) come up with the cash needed to get a new mortgage.
Since you are financing the costs, you'll not only pay them but also interest on them. However, you are only paying them a little at a time, and depending upon how long you remain in the mortgage, they may cost you more or less than if you paid them right up front, as you would have in a traditional refinance.
A "No-Cost" refinance might be your best bet if you don't have cash to spend or equity to use for your refinance. You can still refinance, but you won't get today's rock-bottom interest rate, but instead something slightly above the market. As such, your interest rate and payment differential will be smaller, possibly making your refinance less valuable. We assume that the interest rate available for a "no-cost" refinance will be a half-percentage point higher than if you had paid the fees. If it is different, you can change the information in the yellow box.
In effect, since the whole amount of your loan will be exposed to this "higher-than-market" interest rate, your savings over time will be smaller than if you could use one of the other options.
Below the initial calculations, we've provided some examples of your costs over time, including the interest cost and the remaining loan balance after a given period of time. This way, you can see what those costs will be at varying intervals. You might find, for example, that relative to your time frame, incorporating the fees into the interest rate might mean they cost you less in interest over a given period than the amount you might have paid out-of-pocket up front.
Before you add in your actual numbers, we suggest that you use an example of an existing loan which is three years old, with a $100,000 loan amount for 30 years and a 6% interest rate, and use a 4% rate for refinancing. It will make it easier to follow the discussion of savings comparisons below.
The Blue, Green and Orange displays here will allow you to see if paying or financing the costs of your refinance works out for you over given time horizons. When you pay the fees up front, your interest charges will of course be lower; however, you must overcome what you spent today before savings start to happen.
Let's say that after a year, your traditional refinance has seen you spend a total of $3813 in interest cost. Over the same time, the LCOR's interest cost is $3889, while the "no cost" option has seen you pay $4292.
If you should suddenly sell your home after a year, your actual cost for the traditional refinance would include the $3813 plus an additional $1922 in closing costs for a total of $5735, while the other choices would have cost $3889 and $4292 respectively, so you would have been better off with one of them.
Factoring in the differences in remaining loan balances does change the equation, though. At the end of the 12-month period you still owe $1755 more on the LCOR than the traditional refinance, bringing the total of your LCO refinance to $3955, just slightly better than the paid-up-front choice.
However, building those costs into the interest rate means your "no-cost" refinance has seen you spend $4292 in interest, plus the $142 differential in remaining balance - so the total cost after 12 months is only $4434, a clear winner... over this very short time horizon.
These relationships change over time, however. After 10 years, you've spent a lot more in interest charges in the "no-cost" refinance than you would have if you chose to pay costs or build them into the loan amount.
All this said, in order to determine what your best choice will be over time, you'll need to compare both interest costs and remaining balances among the various methods.
Whatever the method you choose for your refinance, you'll still want to know how much money you'll save relative to your existing loan - your costs if you never refinanced in the first place. The tables and charts below compare the interest costs of your new loan versus old over comparable time periods. As in the example above, this would compare the interest you'll pay in the first twelve months of your new loan versus the interest you would have paid in the period from 37-48 months, and so on.
Refinancing may mean restarting your loan all over again. If you had been in your home for three years, and refinanced to a new 30-year term, you'll pay for your loan for as long as 33 total years. The tables and charts below will let you see how the outstanding balance on your original loan would have fared relative to the new mortgage. Since the new mortgage is restarted all over again, even a significantly lower interest rate may not be able to overcome (or overcome quickly) the benefits of being further along in your amortization schedule, where the principal portion of your payment has grown while the interest component continues to shrink.