Should I refinance?
Refinancing replaces your current loan with a new one, usually to get a lower interest rate, change the term or take cash out of your home equity. The new loan pays off the remaining balance of the old one. This refinance calculator compares the two loans side by side: the monthly payment, length, total payments, total interest, the upfront cost and the break-even point.
Describe your current loan either by its original amount, term and time remaining, or by the remaining balance and monthly payment from your statement. Then enter the new term and rate, points, closing costs and any cash out. The new payment uses the standard mortgage payment formula.
Key terms
- APR includes the points and fees, so it is the fair way to compare the new loan with the rate of the current one. The APR calculator explains it in detail.
- Points are paid upfront for a lower rate. One point costs 1% of the new loan amount.
- Break-even point is the month when the savings cover the upfront cost. If you plan to sell or refinance again before then, refinancing may not pay off.
- Cash out raises the new loan amount, so it increases the payment and the total interest.
How the break-even point is calculated
The quick rule of thumb divides the upfront cost by the drop in the monthly payment:
Break-even (months) = (points + closing costs) / monthly payment savings
The calculator uses a more accurate method: it adds up the interest you save each month — the old balance times the old rate minus the new balance times the new rate — until the total covers the upfront cost. Interest is what you actually lose, while a lower payment can also come from simply stretching the loan over more years.
Example
You owe $250,000 at 7% with 25 years left, and your payment is about $1,766.95. A new 25-year loan at 6% with one point and $3,000 of fees costs $5,500 upfront and lowers the payment to about $1,610.75 — a saving of about $156 a month.
- Rule of thumb: $5,500 / $156.19 ≈ 35.2 months.
- Interest method (used by the calculator): 27 months, because the interest saved at first is larger than the payment drop.
- Over the full term you save about $41,358 after costs.
How much does a lower rate save?
The table compares a $300,000, 30-year loan at 7% with the same loan at a lower rate, and shows how long closing costs of 3% ($9,000) take to earn back by the rule of thumb.
| New rate | New payment | Savings a month | Break-even |
|---|---|---|---|
| 6.5% | $1,896 | $100 | 91 months |
| 6% | $1,799 | $197 | 46 months |
| 5.5% | $1,703 | $293 | 31 months |
| 5% | $1,610 | $385 | 24 months |
A half-point drop barely pays back the costs within the first several years; a full point or more usually does, if you keep the loan long enough.
Watch out for resetting the clock
A lower payment is not always a cheaper loan. Say $250,000 is left at 7% with 20 years to go: the payment is $1,938.25 and the remaining interest about $215,179. Refinancing into a new 30-year loan at 6% cuts the payment to $1,498.88, but stretches the loan by 10 years, and the total interest rises to about $289,595. To lower the rate without adding years, choose a term close to the time you have left — or keep the payment the same and let the mortgage payoff calculator show how much sooner you finish.
Types of refinance
- Rate-and-term refinance changes the rate, the term or both, without taking cash out.
- Cash-out refinance borrows more than you owe and pays you the difference. It is an alternative to a home equity loan or a HELOC, which keep your first mortgage in place.
- Streamline refinance programs for existing FHA and VA loans need less paperwork and often no appraisal.
When refinancing makes sense
- rates have fallen enough that you will pass the break-even point well before you expect to move;
- you want to switch from an adjustable to a fixed rate;
- you can afford a shorter term and want to save interest;
- your credit has improved since you took the original loan.
Closing costs for a refinance are often 2% to 5% of the loan amount. To see how the new loan is paid off month by month, open the amortization calculator.