When refinancing pays
A refinance replaces your mortgage with a new one, usually to get a lower rate, change the term, or take cash out of your equity. It always costs money up front, typically 2% to 5% of the new loan in lender fees, title insurance, appraisal, and prepaid items. So the question is never just "is the new rate lower?" but "do the savings outrun the costs before I move or refinance again?"
Most refinance calculators stop at the monthly savings and a break-even month: closing costs divided by what you save each month. That's a useful first test, and this calculator shows it. It also does the comparison most of them skip. When the new loan starts a fresh term, more of each early payment goes to interest, so you owe more on the new loan years later than you would have on the old one. The calculator counts that difference in the year you expect to move. The net figure is the payments you saved, minus any cash closing costs, plus the gap between the two balances.
If you're buying rather than refinancing, the mortgage calculator covers the full payment with taxes and insurance. To borrow against your equity without replacing your first mortgage, compare this tool with the HELOC calculator.
How to use this calculator
- Enter your current loan. Use the balance from your latest statement, your current rate, and the years left. The calculator works out your principal and interest payment from those three figures.
- Enter the new loan. Use the rate and term from a real Loan Estimate, and the closing costs as a share of the loan. Choose whether you'll pay those costs in cash or add them to the loan.
- Add any cash out. Money taken from your equity raises the new loan. The calculator counts that cash as yours, so a cash-out isn't scored as a loss just because the balance is higher.
- Set how long you'll keep the loan. This is the input that decides most refinances. Be realistic about when you'd sell or refinance again.
- Read the verdict, then the year-by-year table. The table shows when your net position turns positive, which can be later than the simple break-even month.
Formulas & methodology
M = B × r ÷ (1 − (1 + r)^−n)
- B
- Balance owed today
- r
- Current rate ÷ 12
- n
- Years left × 12
L = B + Cash out + Closing costs (if added to the loan)
M' = L × r' ÷ (1 − (1 + r')^−n')
Months = Closing costs ÷ (M − M')
Payments saved = (M − M') × months − Closing costs paid in cash
Net = Payments saved + (Old balance − New balance) + Cash out
Old loan: M × n − B
New loan: M' × n' − L
Balances come from each loan's amortization schedule at the month you move. Closing costs quoted as a share of the loan are solved for when they're added to it, since they then raise the loan they're charged on. Taxes and insurance are left out because a refinance doesn't change them.
Worked example
You owe $320,000 at 7.5% with 28 years left, a payment of $2,281. A new 30-year loan at 6.25% costs $8,000 to close and brings the payment to $1,970, saving $311 a month.
The savings cover the closing costs in about 26 months. After 7 years you've saved $18,114 in payments net of the costs, and you owe $954 less than you would on the old loan, so refinancing leaves you $19,068 ahead.
| Scenario | Monthly savings | Break-even | After 7 years |
|---|---|---|---|
| 6.25%, 30 years | $311 | 26 months | +$19,068 |
| 6.25%, 15 years | -$463 | Never | +$35,340 |
| 7.25%, 30 years | $98 | 82 months | -$3,476 |
The last row is a refinance for only a quarter point. It still lowers the payment, but the savings take 82 months to cover the costs, and the move comes first.
The term-reset trap
Lenders advertise the monthly savings, and a fresh 30-year term makes them look large. But a loan with 28 years left and a new 30-year loan are not the same debt: the new one pays down principal more slowly at first and runs 2 years longer.
In the example, a 15-year loan at the same rate raises the payment by $463, yet leaves you $35,340 ahead after 7 years, against $19,068 ahead for the 30-year loan, and cuts lifetime interest by $272,600. Look at the net figure and the lifetime interest, not just the payment.
Refinance options
- Rate-and-term. Replaces the loan with a lower rate, a different term, or both, without taking cash. The cleanest comparison and usually the lowest rate.
- Cash-out. Borrows more than you owe and pays you the difference. Conventional programs usually cap the new loan near 80% of the home's value, and rates run a little higher than rate-and-term.
- No-closing-cost. The lender covers the fees in exchange for a higher rate. Worth it when you expect to move or refinance again soon; set the closing costs to zero and raise the new rate to compare.
- Streamline programs. FHA Streamline and VA IRRRL refinances skip much of the paperwork, and often the appraisal, for borrowers already in those programs.
Refinance FAQ
- How do you calculate the break-even point on a refinance?
- Divide the closing costs by the monthly savings in principal and interest. $8,000 of costs and $311 a month of savings break even in about 26 months. That simple test misses one thing: if the new loan restarts a 30-year term, you pay down principal more slowly, so the calculator also compares what you'd still owe on each loan on the day you expect to move.
- How much does the rate need to drop to make refinancing worth it?
- The old rule of thumb is half a point to a full point, but the real answer depends on your balance, closing costs, and how long you'll keep the loan. A large balance and a long stay can justify a smaller drop; a small balance or an expected move within a few years may not justify a large one. Run your numbers and look at the result in the year you expect to sell.
- How much are refinance closing costs?
- Typically 2% to 5% of the new loan: origination and lender fees, appraisal, title insurance, recording, and prepaid interest and escrow. You can pay them in cash, add them to the loan, or take a slightly higher rate in exchange for a lender credit that covers them. Your Loan Estimate lists every fee within three business days of applying.
- Is it better to roll closing costs into the loan?
- Rolling them in keeps cash in your pocket but adds them to the balance, where they collect interest for the life of the loan. The calculator treats the costs as real either way: paid in cash, they reduce your savings up front; rolled in, they raise the balance you'd owe when you move.
- Does refinancing reset my mortgage term?
- Only if you choose a new 30-year term. Taking a 15- or 20-year loan, or a lender's custom term matched to the years you have left, avoids stretching the debt out again. A longer term lowers the payment but usually raises the total interest you pay, which the lifetime-interest figure in the calculator shows.
Embed this calculator
Add the live Refinance Calculator to your own site or blog. It runs entirely in the reader's browser, needs no account, and links back to this guide for the formulas.
<iframe src="https://keystonecalculators.com/embed/refinance-calculator" title="Refinance Calculator by Keystone" width="100%" height="1100" style="border:1px solid #0a0a0b;max-width:100%" loading="lazy"></iframe>
Free to use with the credit link intact.