Refinance Calculator Step By Step Guide With Examples

Refinance Calculator

A Refinance calculator is used to find the new installment amount when the borrower refinances his loan with a new interest rate. This can calculate any loan issued on a reducing interest basis. The same can be used to calculate the interest savings amount as well.

Refinance New Installment

(P * R * (1+R)NF )/ ((1+R)NF-1)

P is the outstanding loan balance
R is the new rate of interest
N is the number of periods for which the existing loan will continue
F is the frequency with which the loan shall be repaid i.e. annually, semi-annually, monthly, etc.

About Refinance Calculator

First, we need to determine the outstanding principal balance before the rate changes.

Wherein,

P is the outstanding loan balance.R is the new rate of interestRate Of InterestAn interest rate formula is used to calculate loan repayment amounts as well as interest earned on fixed deposits, mutual funds, and other investments. It is also used to calculate credit card interest.read more.N is the number of periods for which the existing loan will continue.F is the frequency with which the loan shall be repaid, i.e. annually, semi-annually, monthly, etc.

There could be scenarios wherein the borrower has taken the loan during the business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more when there is a high-interest rate prevailing in the market. Due to requirements at that moment, the borrower could not wait further to delay the processing of a loan. Now, assume that the interest rate has come down and the borrower wishes to refinance the loan at a lower rate of interest, and when he does the same, he would be saving the interest outflow, which will reduce the cost of the purpose for which he had borrowed the loan. When the borrower refinances at a lower interest rate, the advantages would be a reduced interest rate and an installment amount. Also, in certain cases, the borrower can repay it sooner if that option is available. Hence, this calculator can calculate the refinanced installment amount and the savings amount.

How to Calculate using Refinance Calculator?

One needs to follow the below steps –

Step#1 – First, one needs to determine the existing installment, an initial loan taken, the number of years for which the loan was taken, and the interest rate.

Step#2 – The borrower should have an option to refinance the loan. Then we should calculate the loan’s outstanding balance if any repayment was made in between. The same can be calculated using the table method, as provided in the example below.

Step#3 – Now, from the above step2, determine the outstanding principal balance amount and the remaining term of the loan (here, we assume that the loan period will remain the same).

Step#4 – Multiplying the principal amount by a new interest rate using the above formula.

Step#5 – Continuing step 4, compound the same by a new rate of interest.

Step#6 – As a final step, discount the result obtained in step 5 per the formula discussed above, which shall be a new installment amount.

Step#7 – To determine the savings, one needs to calculate the difference between the existing and new installments calculated in step 6 and multiply the same with the remaining loan period.

Refinance Calculator Example

Mr. Kedia had purchased a laptop for $13,500, fully financed by Bank of Asia. The Bank has provided him with a five-year loan with a reducing rate method. The rate of interest that the bank will charge is 13.50%, which was charged high because Mr. Kedia’s credit score was below par. However, after paying the installment for two years without any default, the credit score of Mr. Kedia improved, and the bank offered to refinance his outstanding balance at 10.00%, to which Mr. Kedia agreed. The existing installment amount is $310.63, payable in 60 installments.

Based on the given information, you are required to calculate the new periodical installment for the remaining tenure and the savings he would make.

Solution:

We will now summarize the information that we are given.

To calculate the new installment amount, we are first required to calculate the outstanding balance of the loan borrowed, and for the same calculation is below:

The monthly interest rate now will be 10.50% / 12, which is 0.83%, and the outstanding balance of the loan as calculated above at the end of 2 years is 9,153.68 with a loan period of 3 years remaining, which would be 36 months.

At the end of 2 years

= [9,153.68 x 0.83% x (1 + 0.83%)^3×12 ] / [ (1 + 0.83%)^3×12 – 1 ]= 295.36
= 310.63 – 295.36= 15.27 per month
= 36 * 15.27= 549.69