Refinancing or changing bank for your home mortgage

From our calculator's Instructions and Tips

February 19, 2022 by Pietro

Refinancing means changing the terms of an existing mortgage or replacing it with a new mortgage.

It is indeed a good practice to dedicate some time to re-evaluate your mortgage every few year to make sure you are getting the best deal from your bank. This may save you considerable amount of money over the life of the loan and possibly allow you to extinguish your mortgage earlier.

At any time you can rediscuss the terms of your mortgage with your bank or financial institution to:

• Rediscuss your interest rate
• Extend the duration to reduce the monthly payments.
• Change from an adjustable-rate to a fixed-rate loan or vice versa.

Or you might have fund a better annual interest rate offered by another institution and you want to ask your bank if they can match it.

Lowering the interest rate of your loan can save you money and reduce your monthly payment. However, the cost of refinancing, including underwriting and other fees, may be considerable and refinancing might not make sense if you’re only getting a marginally lower rate.

The costs of refinancing a mortgage range from 2% to 4% of the loan amount if you change bank, but it can be cheaper if you refinance with your current bank.

Thanks to our mortgage calculator you can calculate and compare your home loan refinancing options. Let’s see an example.

Home Loan Refinance Calculation Example

Let’s assume the property price was $600,000, the deposit was $150,000 thus the loan amount was $450,000. The monthly costs were 8$, the annual rate was 4.49% and term was 30 year. Let’s assume fourteen years have passed and now you found another bank that offers an interest rate of 4.15% but with monthly costs of 12$. You have calculated that the total cost of switching bank (i.e. fees for closing the current loan plus fees for opening a new one with the new bank) is 2,100$.

You want to know if it’s worth switching bank.

From the bank statement you read that the principal remaining to pay after 14 years is $311,522 (alternatively you can use the calculator and read from the graph how much the principal remaining is after 14 years).

We consider two scenarios:

• The term is equal to the original term less the past years. That is 30 – 14 = 16 year term.
• The deposit is the principal already paid. This is equal to the original property price minus the principal still to be paid. That is: $600,000 - $311,522 = $288,478 deposit.
• The interest rate is 4.15% and
• The monthly costs are 12$.
• We also need to include 2,100$ (the cost of switching loan) on the field ‘Initial Costs’.
• We run the calculation and we click the button ‘Save to Table’.

• The term, property price and deposit are calculated as per scenario 1.  
• Interest rate and monthly fees stay the same.
• Initial Costs stay zero.
• We run the calculation and we click the button ‘Save to Table’.

By looking at the Loan Comparison Table we notice that the Total Repayment over the upcoming 16 years is for the Scenario 1: $432,010, and for the Scenario 2: $438,807. Therefore we can say that it’s worth switching bank, as it saves $6,797 on the loan repayment.

Debt Consolidation

There can be many reasons why you may want to refinance your mortgage. Often these reasons are related to changes of personal circumstances since when you first established you mortgage.

For instance, you may find yourself with some debts that you want to consolidate. Consolidating debts means that you have several high-interest debts which you want to pay off by obtaining a single low-interest loan. High-interest debts usually come from credit cards or personal loans which are charged higher interest rates because, unlike mortgages, they are not secured by any asset. The purpose of debt consolidation is to make the sum of the monthly repayments of the debts more affordable and to save on interests.

If you are consolidating your debts into your mortgage, your bank settles all outstanding debt, all creditors are paid off and the debt is added to the loan amount of your mortgage. Because the mortgage is secured by your house, the interest rate that your bank is going to apply on your debt is lower compared to credit card interest rates. The downside is that your bank now owns a bigger portion of your house, which will likely increase the duration of your mortgage.

Be aware that debt consolidation on your mortgage can be risky if you don’t have the self-discipline necessary to save money wisely and to pay down the loan on time.

The decisions you make when you refinance your mortgage have an impact on the life of the loan, therefore can affect your retirement plans. Most people aim to close their mortgages before retirement, in consideration of having a fix income after that.

Cash-out Refinance

If the purpose of refinancing is to have extra money available, this is called “cash-out refinance”.   

For example, some people use this type of refinance to pay off student loans, medical bills or to get a deposit to buy another property.

Cash-out refinance adds extra debt to the loan and results in increasing the time and interests over the life of the mortgage.

How to use the Calculator to account for Debt Consolidation or Cash-out Refinance?

You can evaluate the effects of refinancing for Debt Consolidation and Cash-out Refinance using the calculator.

Both circumstances involve adding extra debts to the loan amount of the mortgage. If you are not changing the term of the mortgage, then we can think of the extra debt as a ‘negative lump sum repayment’ in the calculator. Therefore, simply select ‘Lump Sum Repayment’ in the ‘More Options’ menu and insert the amount of debt or cash-out, preceded by a ‘minus’ symbol. In case you are also renegotiating the interest rate, then you can adjust this as well by selecting ‘Interest Rate Changes’ from the ‘More Options’ menu.

Once you run the calculation, you can see the effect of your changes on the >Charts.

If you are asking your bank to also adjust the term of the mortgage, then it’s like calculating an entirely new mortgage. You can simply run a new calculation where the loan amount is the sum of the principal still to be paid plus the debt or cash-out. Interest rate, term and costs are part of a new negotiation with the bank.