How to use the Refinance Calculator
- Enter your current loan balance, your current interest rate and the number of years left on the loan.
- Enter the new interest rate and the term of the new loan.
- Enter the closing costs you would pay to refinance. Ask the lender for the estimate.
- Read the monthly saving and the break-even point, and compare it with how long you plan to keep the home or loan.
Formula used
Payment = B × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1) for each loan. Break-even months = closing costs ÷ monthly saving. Lifetime saving = old payments − (new payments + closing costs).
Worked example
Here is the Refinance Calculator worked through with the example values shown above, so you can check each step by hand.
| Inputs | |
|---|---|
| Current loan balance | $300,000 |
| Current interest rate | 7 % |
| Years left on current loan | 25 years |
| New interest rate | 6 % |
| New loan term | 25 years |
| Closing costs | $4,000 |
| Result | |
| Monthly saving | $187.43 |
| Current monthly payment | $2,120.34 |
| New monthly payment | $1,932.90 |
| Break-even point | 22 months (1.8 years) |
| Saving over the full terms, after costs | $52,230 |
Savings at different new rates
For the default loan with the same remaining term and closing costs.
| New interest rate | Monthly saving | Break-even point |
|---|---|---|
| 5 % | $366.57 | 11 months (0.9 years) |
| 5.5 % | $278.08 | 15 months (1.3 years) |
| 6 % | $187.43 | 22 months (1.8 years) |
| 6.5 % | $94.72 | 43 months (3.6 years) |
| 7 % | $0.00 | Never: the new payment is not lower |
How the comparison works
Both payments are calculated with the standard amortisation formula on the same balance. For a $300,000 balance with 25 years left at 7%, the payment is $2,120.34. A new 25-year loan at 6% brings it to $1,932.90, a saving of $187.43 a month.
Closing costs of $4,000 are paid up front, so break-even is the costs divided by the monthly saving: $4,000 ÷ $187.43, about 22 months (1.8 years). If you keep the loan longer than that, the refinance pays for itself; if you sell or refinance again sooner, it does not.
The lifetime saving line
The last result compares everything you would pay on the old loan with everything you would pay on the new loan, including closing costs. With the default numbers the difference is $52,230 in favour of refinancing.
Be careful when the new term is longer than the time left on the old loan. A 30-year refinance of a loan with 25 years left lowers the payment to $1,798.65, but the lifetime result becomes $-15,413, because you pay interest for five extra years. A lower monthly payment is not always a cheaper loan.
How the new rate changes the result
With the same terms and costs, a new rate of 5% saves $366.57 a month and breaks even in 11 months. At 6.5% the saving falls to $94.72 and break-even takes 43 months. If the new rate is only slightly lower than your current one, the closing costs may take many years to recover.
A common guideline is to consider refinancing when the new rate is at least about half to one full percentage point lower, but the right answer depends on your balance, your costs and how long you will stay. Use the numbers, not the rule.
Other reasons to refinance
Some people refinance to switch from an adjustable rate to a fixed rate, to shorten the term, to remove a co-borrower or to take cash out. Those goals can be worth it even when the monthly saving is small, but they change the calculation. A cash-out refinance, for example, increases the balance, which this calculator does not model.
Also consider fees such as appraisal, title, origination and prepayment penalties on your current loan. Include every cost you will really pay in the closing cost field.
Before you decide
Get at least two or three quotes and ask for the full estimate of costs. Check how the new loan affects the number of years you have left to pay, and compare the total cost, not only the payment. If you may move within a few years, a long break-even makes refinancing a poor deal.
This calculator is a planning tool and not a loan offer. Your lender’s figures are final.
Frequently asked questions
When does refinancing make sense?
When the monthly saving recovers the closing costs within the time you expect to keep the loan, and the lower payment is not bought with a much longer term.
What is the break-even point?
The number of months it takes for the monthly savings to equal the closing costs. After that point you are ahead.
Does a longer new term cost more?
It can. A longer term lowers the payment but adds years of interest. Compare the lifetime saving result, not just the monthly figure.
What closing costs should I enter?
Use the total from the lender’s loan estimate: origination, appraisal, title, recording and any other fees you will pay at closing.
Does this include cash-out refinancing?
No. The calculator assumes the new loan equals your current balance. If you borrow more, the new payment and total cost will be higher.
Are the results guaranteed?
No. They are estimates for fixed-rate loans. Your lender’s final figures may differ.
This calculator gives estimates for information only. Actual figures from a bank, employer, tax authority or doctor may differ. It is not financial, tax, legal or medical advice.