How it's calculated
Refinancing replaces your current mortgage with a new one, usually to get a lower rate, change the term or take cash out. It saves money only if what you save each month outweighs what the new loan costs to get. The calculator compares the two loans in three ways:
- Monthly savings: your current principal-and-interest payment minus the new one.
- Break-even month: how long the monthly savings take to pay back the closing costs. The Federal Reserve's refinancing guide uses the same test: divide the total fees and closing costs by the monthly savings.Federal Reserve Board If you expect to sell or refinance again before that month, the refinance probably doesn't pay.
- Lifetime cost: every payment left on your current loan versus every payment on the new loan plus the closing costs you pay in cash. A lower payment over a longer term can still cost more in total.
The formula
- Current payment = B × r ÷ (1 − (1 + r)−m), where B is your balance, r your current rate ÷ 12 and m the months left. This assumes you are on your original schedule.
- New loan amount = B, plus the closing costs if you roll them into the loan.
- New payment = the same formula with the new rate and term.
- Monthly savings = current payment − new payment.
- Break-even month = closing costs ÷ monthly savings, rounded up to a whole month.
- Interest difference = interest left on the current loan − interest on the new loan, each from a full month-by-month schedule.
- Lifetime savings = all remaining current payments − (all new payments + closing costs paid in cash).
The Fed's example compares a $200,000, 30-year loan at 6% ($1,199 a month) with a new loan at 5% ($1,073), saving $126 a month; with $2,500 in fees its worksheet, after an optional tax adjustment, recovers the costs in 27 months. The calculator skips that optional tax adjustment and shows the pre-tax break-even.
Worked example
Refinancing a $300,000 balance with 27 years left at 7% into a new 30-year loan at 6% lowers the payment from $2,063.44 to $1,798.65, a saving of $265 a month. With $6,000 of closing costs, break-even comes at Month 23 (1 year 11 months).
| Line | Current | New |
|---|---|---|
| Loan balance | $300,000 | $300,000 |
| Monthly payment (P&I) | $2,063 | $1,799 |
| Interest still to pay | $368,559 | $347,515 |
| Closing costs paid in cash | $0 | $6,000 |
| Total still to pay | $668,559 | $653,515 |
Because the new loan adds three years, the lifetime saving after costs is $15,044, much less than the monthly saving times 360. A 20-year refinance at the same rate saves $146,728 over its life, though its payment is higher.
Assumptions and limitations
- Principal and interest only. Taxes and insurance don't change when you refinance. Mortgage insurance might, and is not modeled.
- Your current loan is on schedule. If you've paid extra, enter your actual balance and the years left; the current payment shown may then be lower than your real one.
- Closing costs should include lender fees, title, appraisal and any points. Prepaid interest and escrow deposits are not true costs of refinancing, but they are cash you'll need at closing.
- No tax adjustment, cash-out or rate changes. Fixed rates on both loans.
- Rolling costs into the loan avoids cash at closing but adds interest on those costs; the break-even month still counts the full costs.