Refinancing replaces existing debt with a new plan. The goal may be to reduce the monthly burden, lower lifetime cost or consolidate obligations, but a lower advertised rate does not automatically mean savings.
How to test the benefit
Add all remaining payments on the current loan. Then calculate every payment, fee, insurance charge and switching expense under the new plan. A lower new total can indicate a real saving. Use the refinance calculator.
Why a lower monthly payment can mislead
If the new term is much longer, the payment falls but interest runs for more months. Compare both the monthly difference and the total difference.
Include switching costs
- new origination fees;
- mandatory insurance;
- early settlement charges on the old loan;
- interest created between settlement dates.
Refinancing versus extra repayment
If spare cash is available, reducing principal without a new agreement can be an alternative. Compare the early repayment result with refinancing after all costs.
Calculate the payment and total cost in the loan calculator, then compare different terms side by side. Loan calculator · Compare plans.
This article is informational and is not individual financial advice. Assumptions are documented in the methodology and content standards in the editorial policy. Calculation methodology · Editorial policy.