A lower rate is not automatically a cheaper mortgage. Refinancing costs money up front, and restarting the term can add interest even while the payment falls. The useful question is when the savings have paid for the fees, and whether you will still have the loan then.
Break-even is the only date that matters at first
The calculator prices your current balance at the old rate for the years you have left, then prices the same balance at the new rate and term. The difference in principal and interest is the monthly savings. Divide the closing costs by that savings and you get the month the refinance has paid for itself.
Closing costs are paid in cash here. They are not added to the new loan. If you roll them in, the balance is higher and break-even moves further out. If the new payment is not lower, there is no break-even. You would be paying fees to raise the bill.
A smaller payment can still cost more
Resetting a loan that had 27 years left into a new 30-year term lowers the payment partly because the debt is stretched, not only because the rate fell. Compare total interest, then subtract the fees. That net number is the real savings if you keep the loan to the end.
If you might move or refinance again before break-even, the fees are hard to justify. Ask for a quote that matches the term you have left, not only a new 30-year term. The annual percentage rate reflects the fees. The interest rate alone does not.
What this comparison leaves on the table
Taxes and insurance do not change just because you refinance, so they are left out of both payments. Cash-out is left out too. The new loan is the same balance you entered. Taking cash out is a different decision, because you are borrowing more, not only borrowing cheaper.
A small rate drop on a small balance often fails this test. A larger drop, or a large balance you will keep for years, often passes. Run your loan estimate, not a rate you saw in an ad.
How to use the refinance break-even calculator
Break-even is how long the monthly savings take to repay the closing costs. If you move or refinance again before that month, the new loan costs more than it saves. A lower payment is not the same as a cheaper loan: stretching the term back to 30 years can raise the interest you pay even when the payment drops.
- Enter the balance you still owe, not the original loan amount.
- Enter the rate and the years left on that loan. Your statement has both.
- Enter the new rate, the new term, and the closing costs from the loan estimate.
- Read the break-even time first. Then check whether total interest actually falls.
How the math works
Monthly savings
The calculator prices your current balance at the old rate for the years you have left, then prices the same balance at the new rate and term. The difference in principal-and-interest payments is the monthly savings. Closing costs are paid in cash. They are not added to the new balance.
Break-even
Divide the closing costs by the monthly savings. That is the number of months until the refinance has paid for itself. There is no break-even if the new payment is not lower.
Total interest
Interest saved compares the interest left on the current loan with the interest on the new loan. Subtract the closing costs to see the net. A longer new term can erase the benefit of a lower rate.
A $340,000 balance, from 7.1% to 6.1%
The defaults keep 27 years on the current loan and refinance into a 30-year loan at 6.1%, with $6,500 of closing costs.
The payment falls from about $2,361 to about $2,060, a savings of about $300 a month. Closing costs are covered in about 22 months. Interest over the life of the loans falls by about $23,000, or about $17,000 after the fees.
Terms worth knowing
- Break-even
- The month when payment savings have repaid the closing costs.
- Closing costs
- Lender and third-party fees to open the new loan. Paid up front in this calculator.
- Term
- How many years the new loan lasts. Resetting to 30 years lowers the payment and can raise total interest.
- Rate-and-term refinance
- A refinance that changes the rate or the length of the loan, without taking cash out.
What to do with the number
Ask for a quote that matches the term you have left, not only a new 30-year term.
If you might move before the break-even month, the fees are hard to justify.
Rolling closing costs into the loan raises the balance and pushes break-even further out. This tool assumes you pay them in cash.
Compare the annual percentage rate, not only the interest rate. The APR reflects the fees.
Questions people ask
What this leaves out
Closing costs are paid in cash and are not financed.
Both rates are fixed.
You do not add extra principal payments.
Points, escrow, and mortgage insurance are only included if you put them in closing costs.
These figures are estimates to help you understand the tradeoff. They are not tax, legal, insurance, or investment advice. A fiduciary can look at the same numbers in the context of the rest of your plan.