How refinancing math works
Refinancing swaps your current mortgage for a new one, usually to capture a lower rate or change the term. The benefit is a smaller monthly payment; the cost is the closing costs you pay up front to set the new loan up.
To judge whether it is worth it, this calculator prices both loans the same way — the standard amortized payment formula — then compares them. Dividing the closing costs by the monthly savings gives the break-even point: the month at which the savings have fully repaid what the refinance cost you.
Reading the comparison
Monthly savings is the difference between your current payment and the new one. The break-even figure tells you how many months you must keep the loan before you come out ahead, and lifetime savings nets the total payment difference against the closing costs.
The grouped bars put the two monthly payments side by side, while the cumulative-cost chart draws both loans as running totals. The point where the new line (which starts higher because of closing costs) drops below the old line is your break-even month.
When refinancing pays off
The right answer depends as much on your plans as on the rate.
- Refinance when you will stay in the home well past the break-even month.
- Watch the term — restarting a 30-year clock can raise lifetime interest even at a lower rate.
- Factor in closing costs honestly; rolling them into the balance hides but does not remove them.
- Reconsider if you plan to sell soon, since you may move before recovering the costs.
Caveats to remember
This model assumes both loans run to the end of their stated terms and ignores taxes, the time value of money and any change in escrow. Lifetime savings compares total dollars paid, not their present value, so treat it as a guide rather than an exact figure.
Formula
breakEven = closingCosts / monthlySavings; lifetimeSavings = (currentRemaining·currentPmt) − (newPmt·newTerm) − closingCostsFrequently asked questions
- What is the break-even point?
- It is the number of months of payment savings needed to recover the closing costs. If you plan to keep the home past that point, refinancing usually pays off.