Loan Refinance Comparison Calculator: Understanding Your Options
What is Loan Refinancing?
Loan refinancing is the process of replacing an existing loan with a new loan, typically with more favorable terms such as a lower interest rate or a different loan term. The goal of refinancing is often to save money on interest, lower monthly payments, or both.
The Loan Refinance Comparison Formula
To compare loan refinancing options, we need to calculate the monthly payments for the current loan and the potential new loans. The formula used for this is:
\[P = L\frac{r(1+r)^n}{(1+r)^n-1}\]
Where:
\(P\) = Monthly payment
\(L\) = Loan amount or remaining balance
\(r\) = Monthly interest rate (annual rate divided by 12)
\(n\) = Total number of months in the loan term
To calculate the remaining balance on the current loan, we use:
\[B = L\frac{(1+r)^p - (1+r)^n}{1 - (1+r)^n}\]
Where:
\(B\) = Remaining balance
\(L\) = Original loan amount
\(r\) = Monthly interest rate
\(p\) = Number of payments made
\(n\) = Total number of payments in the original loan term
Step-by-Step Calculation Process
Calculate the monthly interest rates for the current loan and refinancing options.
Calculate the current monthly payment using the original loan amount and terms.
Calculate the remaining balance on the current loan.
Calculate the new monthly payments for each refinancing option using the remaining balance and new terms.
Compare the current monthly payment with the new monthly payments to determine potential savings.
Example Calculation
Let's compare a current loan of $200,000 at 5% interest for 30 years with two refinancing options:
Calculate the monthly interest rate:
\[r = \frac{\text{Annual Interest Rate}}{12}\]
Apply the formula to calculate the monthly payment.
Calculate total payment:
\[\text{Total Payment} = \text{Monthly Payment} \times \text{Number of Months}\]