Mortgage refinance calculator

How the formula works

Both loans are ordinary fixed-rate amortizations, so both payments come from the same closed form:

The current payment uses your balance \(L\), your current rate and the months you have left. The new payment uses the same balance at the new rate over the new term — this calculator assumes you pay the closing costs in cash rather than rolling them into the loan, so \(L\) does not change. The refinance then earns its keep one month at a time:

If the new payment is not actually lower, there is nothing to divide by — the costs are never recovered from the payment, and the worksheet says never.

Break-even alone is not the whole answer, and the trap hides in the term. Refinance 25 remaining years into a fresh 30 and part of your "saving" is not the rate at all — it is the same debt spread over five extra years of payments. The monthly number falls, the break-even arrives on schedule, and the loan can still cost more over its life than the one you left. So the worksheet totals the lifetime outlay both ways — every remaining payment on the old loan against every payment on the new one plus the costs — and the lifetime difference line carries the verdict, sign and all.

What each input means

Current loan balance — \(L\)

What you owe today, from your statement — not the original loan amount. This is the balance both payments are computed on.

Current rate and years remaining

The note rate on your existing loan and how long it has left to run. On a 30-year loan that is five years old, enter 25. Fractions are fine.

New rate

The note rate you are being quoted, not the APR. Quotes depend on your credit score, the loan-to-value ratio and whether you pay points — the same borrower can be quoted meaningfully different rates on the same day.

New term

Most refinances reset to a fresh 30 years, which is where the trap lives. Choose match remaining term to see the refinance with the term reset stripped out — the rate's effect alone.

Closing costs

Everything the refinance costs up front: origination, appraisal, title, recording, and any points you pay. Typically 2–6% of the loan amount. The model assumes you pay this in cash at closing; financing it into the balance changes the arithmetic and hides the cost.

A worked example

The worksheet's defaults: a $300,000 balance at 7.0% with 25 years left, refinanced to 5.75% over a fresh 30 years, with $6,000 of closing costs paid in cash.

• Current payment: $300,000 at 7.0% over 300 months = $2,120.34.
• New payment: $300,000 at 5.75% over 360 months = $1,750.72.
• Monthly saving: $2,120.34 − $1,750.72 = $369.62.
• Break-even: $6,000 / $369.62 ≈ 16.2, so the costs are recovered in month 17 — about 1.4 years.

Now the honest part. Staying the course costs $2,120.34 × 300 = $636,101 ($336,101 of it interest). The refinance costs $1,750.72 × 360 + $6,000 = $636,259 ($336,259 of interest and costs). At these rates the 25→30 reset costs about $157 more overall — the $370 monthly saving is real, but five extra years of payments eat the rate's entire advantage. Pick match remaining term in the worksheet and the same rate saves $63,906 over the life of the loan instead.

Assumptions and limits

• Closing costs are paid in cash at the table, not financed into the new balance. Rolling them in raises the balance and the new payment, and pushes the true break-even later than shown.
• Points are not modeled separately — if you buy the rate down, fold the cost of the points into the closing-costs figure and enter the bought-down rate.
• Property tax and insurance are unchanged by a refinance, so they are left out on both sides. Only principal and interest are compared.
• Rate quotes vary with credit score, loan-to-value and market day; the comparison is only as good as the quote you type in.
• The lifetime comparison is a simple cumulative one — it ignores what the freed-up monthly cash could earn elsewhere, and the time value of money generally. Arithmetic, not advice.

Questions people ask

How much does refinancing cost?

Typically 2–6% of the loan balance, all in: origination and underwriting fees, a new appraisal, title search and insurance, recording fees, and any points. On a $300,000 loan that is roughly $6,000 to $18,000. “No-cost” refinances exist, but the cost does not vanish — it is paid through a higher rate or a bigger balance, which this calculator would count against the deal if you priced it honestly.

Is the 1%-rate-drop rule of thumb right?

It is a shortcut, not a law. The real test is the one on this page: how fast the monthly saving repays the closing costs, and whether the lifetime total actually falls. A half-point drop can clear both hurdles on a large balance with cheap closing costs and many years left; a full point can fail them on a small balance, an expensive closing, or a loan that is nearly paid off. Run the numbers instead of the rule.

What does resetting from 25 to 30 years really do?

It splits your saving in two. In the worked example the payment drops $370 a month — but only about $233 of that comes from the lower rate; the other $137 comes from stretching the same debt over five extra years. Those five years carry their own interest: the reset version costs about $157 more overall versus staying put, while the same 5.75% rate over the matching 25 years saves about $63,906. Lower payment and lower cost are different questions; the worksheet answers both.

Should I pay points for a lower rate?

Points are prepaid interest — typically 1% of the loan buys the rate down by roughly a quarter point. They are just another closing cost with their own break-even: fold their price into the closing-costs box, enter the bought-down rate, and see whether the longer break-even still arrives well before you would sell or refinance again. Points only pay if you keep the loan past that point.

Does refinancing hurt my credit?

Briefly and mildly. The lender's hard inquiry can shave a few points, and closing an old account while opening a new one lowers the average age of your credit. Scores typically recover within a few months of on-time payments on the new loan. Rate-shopping is also forgiven: multiple mortgage inquiries inside a short window — 14 to 45 days depending on the scoring model — count as one.