How to use the mortgage refinance calculator
The example is a homeowner with $300,000 left to pay at 7.25% and 25 years remaining, offered a new 30 years loan at 6.25% with $6,000 of closing costs.
- Current loan. Take the balance from your latest statement and the rate from your note. For years left, count the payments remaining and divide by 12; the calculator accepts decimals such as 26.5.
- New loan. Enter the rate you were quoted and choose the term. Try a term close to your remaining years as well as a full 30 years; the difference is the main lesson of this page.
- Closing costs. Use the total from the lender’s Loan Estimate, including points.
- Paid in cash or added to the loan. Adding them to the loan avoids cash at closing but raises the new balance.
The results compare principal and interest only. Property tax and insurance stay the same whichever loan you hold, so they cancel out.
How the refinance is compared
Both loans use the standard payment formula. Their payments, interest and balances are then compared month by month.
Monthly savings = Current payment − New paymentL is the balance (plus closing costs if they are added to the loan), i the annual rate ÷ 12 and n the number of monthly payments: the months left on the current loan, or the new term × 12.
The calculator shows two break-even points:
Interest break-even = first month where Σ (Interestcurrent − Interestnew) ≥ Closing costs
Lifetime savings = Interest left on current loan − Interest on new loan − Closing costsThe sums run from the first month after the refinance.
A worked example
At 7.25%, the current payment is $2,168.42. The new 30 years loan at 6.25% costs $1,847.15, a saving of $321.27 a month.
Dividing the $6,000 of closing costs by that saving gives a simple break-even of 18.7 months. Counting only interest avoided, the refinance pays for itself in Month 25 (2 yr 1 mo). Five years in, you are $7,617 ahead on interest after costs.
But the current loan has $350,526 of interest left to run, and the new one charges $364,975 over 30 years. Over the whole life of the debt, the refinance costs $20,448 more after closing costs, even though the rate is a full point lower.
Why a lower rate can still cost more
A refinance changes two things at once: the rate and the length of the debt. The lower rate saves interest every month. The new term adds months of payments the old loan no longer had. In the example the current loan would be paid off in 25 years; the new one runs 30.
The chart shows how this plays out. Net savings climb for years and peak at $21,100 in year 15. After that the old loan’s balance is shrinking faster, so its interest drops below the new loan’s and the savings start to shrink. From year 26 the old loan would have been gone, while the new one still charges interest on a balance of $94,973. By the end, the extra five years have used up every dollar the lower rate saved.
The term you choose decides which effect wins:
| New term at 6.25% | New payment | Break-even month | Lifetime savings after costs |
|---|---|---|---|
| 30 years | $1,847.15 | Month 25 (2 yr 1 mo) | -$20,448 |
| 25 years (same as now) | $1,979.01 | Month 24 (2 yr) | $50,824 |
| 20 years | $2,192.78 | Month 23 (1 yr 11 mo) | $118,258 |
| 15 years | $2,572.27 | Month 22 (1 yr 10 mo) | $181,518 |
Matching the remaining 25 years still cuts the payment by $189.41 and saves $50,824 over the life of the loan. A 20-year loan costs about the same each month as the current one ($2,192.78 against $2,168.42) and saves far more. Another option is to take the 30-year loan for its flexibility and keep paying the old amount: the extra payment calculator shows how much faster that clears the balance.
Which break-even to trust
The simple break-even, costs divided by monthly savings, is the figure most lenders quote. It answers a cash-flow question: when have the lower payments repaid what you spent to get them? That is useful if the main goal is a smaller monthly bill.
It can mislead, though, because part of every payment is principal you would have repaid anyway. When the new loan is longer, a slice of the “savings” is just slower repayment, and you get it back as a larger balance. The interest break-even ignores principal and counts only the cost of borrowing, so it is the better test of whether the refinance is a good deal. In the example they are 18.7 months and Month 25 (2 yr 1 mo); when the new term is much longer than the old one, the gap widens.
Whichever you use, compare it with how long you expect to keep the loan. If you might sell or refinance again before the break-even month, the closing costs are unlikely to be recovered.
Points, costs and small rate drops
Closing costs are usually 2% to 5% of the loan, and they are what make a small rate cut hard to justify. With a new rate of 6.75% instead of 6.25%, the payment falls by $222.63 a month and the simple break-even stretches to 27.0 months.
Rolling costs into the loan avoids paying cash but borrows them for the full term. In the example it lifts the payment to $1,884.09 and moves the interest break-even to Month 29 (2 yr 5 mo). Paying points to buy a lower rate is the opposite trade: more cash today for lower interest later, which pays only if you keep the loan long enough.
What this calculator does not include
- Cash-out refinancing. Borrowing more than you owe changes the comparison: the extra cash has its own cost.
- Taxes. Mortgage interest may be deductible if you itemize, which reduces the value of both the savings and the costs.
- Investment of the savings. The calculator does not assume you invest the monthly difference.
- Escrow refunds and prepaid interest. These shift cash around at closing but do not change the cost of either loan.
- Adjustable rates. Both loans are fixed-rate; for an ARM, see the fixed vs variable mortgage calculator.