How the Refinance Calculator Works
Refinancing means replacing your mortgage with a new one, usually to get a lower rate, a lower payment or a different term. It is not free: you pay closing costs, and a new loan starts a new clock. The Refinance Calculator compares your current loan with the new one, so you can see if the switch really saves money, and when.
What you enter
- Current loan balance, rate and years left: what you owe today, the interest rate you pay now, and how long the loan still has to run.
- New rate and term: the offer you are looking at.
- Closing costs: fees for the new loan, often 2% to 5% of the amount. You can pay them in cash or add them to the new loan.
- Cash out (optional): extra money you borrow and take now, which is added to the new loan.
Step 1: the two monthly payments
Both payments use the standard loan formula, where P is the loan, r is the monthly rate (the yearly rate divided by 12) and n is the number of months:
payment = P x r x (1 + r)^n / ((1 + r)^n - 1)
The current payment uses your balance and the time left. The new payment uses the new loan amount, which is your balance plus any cash out, plus the closing costs if you add them to the loan. The payments cover principal and interest only. Taxes and insurance are the same either way, so they are left out.
Step 2: what refinancing has saved so far
A lower payment does not always mean a better deal, because a longer loan means more months of interest. So the calculator does not stop at the payment. Month by month, for each loan, it adds what you have paid to what you still owe. It then subtracts the new loan's total from the current loan's:
saved so far = (paid + still owed on current loan)
- (paid + still owed on new loan + closing costs paid in cash - cash out)
It starts below zero, at minus the closing costs. The break-even point is the first month when the number reaches zero. From then on, refinancing is ahead. The last figure is what you save, or lose, over the full loans.
A worked example
You owe $280,000 at 7.25% with 27 years left. You are offered 6% over a new 30 years, with $5,000 in closing costs, which you pay in cash.
| Result | Amount |
|---|---|
| Current payment | $1,971.74 a month |
| New payment | $1,678.74 a month |
| Payment drops by | $293.00 a month |
| Break-even point | 1 year 6 months |
| Interest left on the current loan | $358,845 |
| Interest on the new loan | $324,347 |
| Saved over the full loans | $29,498 |
Notice that the new loan runs 3 years longer. Part of the lower payment comes from spreading the debt over more time. The calculator says so when that happens.
Chart: how the savings build up
The same example. Each bar shows how much refinancing has saved by that year, in thousands of dollars. It starts $5,000 behind because of the closing costs, moves ahead, and then shrinks near the end because the new loan lasts longer:
Start (-5.0, the closing costs) Year 3 █████ 5.3 Year 6 ██████████████ 15.0 Year 9 ██████████████████████ 23.9 Year 12 █████████████████████████████ 31.8 Year 15 ███████████████████████████████████ 38.1 Year 18 ███████████████████████████████████████ 42.3 Year 21 ████████████████████████████████████████ 43.8 Year 24 ██████████████████████████████████████ 41.7 Year 27 ████████████████████████████████ 34.8 Year 30 ███████████████████████████ 29.5
Should you refinance?
- Check the break-even point against how long you will stay. If you plan to sell before it, you lose money.
- Compare the total, not just the payment. A lower payment on a longer loan can cost more overall. Try a new term equal to your years left, to compare like with like.
- A shorter term raises the payment but can cut the interest by a lot.
- Cash out raises the loan and the interest. It can make sense to pay off higher-rate debt, but it lowers your home equity.
- Adding costs to the loan saves cash today, but you pay interest on those costs for years.
What this calculator does not include
- Property tax, insurance and mortgage insurance, and any change in them.
- Tax effects, such as the mortgage-interest deduction.
- Points, lender credits and other fees that differ from lender to lender. Put your best estimate in the closing costs box.
- What you could earn by investing the money you save each month.
This tool gives an estimate for general information only. It is not financial advice. Ask your lender for a Loan Estimate, which shows the exact rate, payment and fees.