The Bigger the Rate Gap, the More You Save
Refinancing a loan means taking out a new loan at a lower interest rate to pay off an existing higher-rate loan. The math is simple: the larger the rate difference and the larger the balance, the more you save. A 8% rate drop on a $20,000 balance saves $1,600 per year in interest alone.
This calculator estimates savings using simple interest โ useful for quick comparisons. Actual loans may use amortized interest, where your principal declines over time and the absolute interest savings differ slightly. The direction of the savings (positive or negative) is the same either way.
Before refinancing, factor in origination fees on the new loan (often 1โ6% of the loan amount) and any prepayment penalty on the old one. If those fees exceed the interest savings over your remaining term, refinancing may not be worth it.
Your credit score heavily influences the rate you'll receive. Borrowers with a 740+ credit score typically qualify for the best rates. If your score has improved since you took out the original loan, now may be the right time to refinance.
Frequently Asked Questions
Online lenders can fund a refinance loan in 1โ3 business days. Traditional banks and credit unions may take 1โ2 weeks. The process includes a credit check, income verification, and loan origination โ gather documents in advance to speed things up.
Refinancing makes less sense if you plan to pay off the balance very quickly, since you won't have enough time to recoup origination fees through interest savings. Calculate the break-even point: fee รท monthly savings = months to recoup.