How to Calculate a New Interest Rate for Refinancing
Calculating a new interest rate on a refinance is quite simple. You can use a business or real estate calculator or the mathematical formula for Time Value of Money. If you are refinancing and you know your new rate, you will likely need to find out what your new monthly payment will be to determine your savings.
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Instructions
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Determine your equity. There must be enough equity to refinance your home. If you know what your home is worth and what you owe to your mortgage company, determining your equity is simple. For example, if your home is worth $100,000 and you currently owe $75,000, you owe 75 percent of the value of your home, meaning you have 25 percent equity, or $25,000. To determine the equity, simply divide what you owe on your home by your value ($75,000 / $100,000 = .75, or 75 percent. $100,000 - 75 percent = $25,000). To refinance using this example, you would need a $75,000 new mortgage, depending on your closing costs, to replace the old loan.
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Shop for a new rate. Start by contacting banks and mortgage companies in your area. Ask a mortgage representative for a list of rates on 10-, 15-, 20- and 30-year home loans. Look for the lowest rate possible. When you find a new rate, you must calculate your new payment to do a side-by-side comparison of your current payment. This difference represents your monthly savings.
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Calculate your new payment. If you have a business calculator such as the Texas Instruments BA II Plus (see Resources), use the simple Time-Value-of-Money (TMV) feature to determine your new payment. Follow these steps:
1. Enter your new mortgage amount.
2. Press the "PV" key (Present Value).
3. Enter your new interest rate.
4. Press the "I/R" key (Interest paid during the year).
5. Enter in the number of months (360 for 30 years, 240 for 20 years).
6. Press the "N" key (Number of Months).
7. Press the "CPT" key (Compute).
8. Press the "PMT" key. Your new monthly payment will be displayed.
Depending on the make and model of your calculator, the keys may be labeled differently; however, TMV features are almost always fairly self-explanatory.To calculate your new payment based on your new rate without a calculator, you must solve for "M," your monthly payment (M = P [ i(1 + i)n ] / [ (1 + i)n - 1]). A basic algebra textbook can help you; however, it's much easier to simply spend the $20 to $40 on a business calculator.
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Tips & Warnings
Make sure your calculator is properly set before using the TMV feature. This can be done by using a pin or other sharp object to trigger the reset button on the back of the device.
