Refinance Calculator

Example Calculation

A homeowner owes $300,000 at 7.5% with 27 years left. The payment for principal and interest is $2,162.20. A new 30-year loan at 6.5% would cost $1,896.20, which saves $266.00 a month. Closing costs of $6,000 paid in cash take 23 months to earn back ($6,000 / $266.00). If the owner stays seven years, the refinance leaves them $13,494 ahead once the payments made and the balance still owed are counted.

The new loan restarts the clock. It is a 30-year loan, while the old one had 27 years left, so the total interest over the life of the loan is $382,633 on the new loan against $400,553 left on the old one, a change of -$17,920. A lower payment is not the same as a cheaper loan. If you want to pay the same number of years as before, choose a shorter new term.

The same refinance with different new terms

$300,000 balance, 7.5% now with 27 years left, 6.5% new rate, $6,000 of closing costs paid in cash.

A shorter term raises the monthly payment but cuts the interest the most. A 30-year term gives the lowest payment and the longest wait to pay off the loan.

Break-even time by closing cost

Same loan, monthly savings of $266.00 on the 30-year option.

How It Works

A refinance replaces your mortgage with a new one, usually at a lower rate. You pay closing costs to get it. The question is whether the monthly savings pay back those costs before you move or refinance again. The Federal Reserve’s consumer guide to refinancing gives the same test: divide the total costs by the monthly savings and you get the number of months to break even. If you stay longer than that, you gain.

This calculator does that and a little more. It works out the payment on your current loan from the balance, the rate and the years left, and the payment on the new loan from the new rate and term. If you choose to roll the closing costs into the loan, the new loan is bigger by that amount and you pay interest on it. The break-even point does not tell the whole story, so the calculator also adds up what you would pay and still owe on the day you leave. It compares the cost of keeping the old loan with the cost of the new one, including the closing costs, and shows the difference.

Two things can make a lower payment misleading. A longer new term lowers the payment but spreads the debt over more years, so the total interest can rise even at a lower rate. And closing costs can be large: the Federal Reserve says it is not unusual to pay 3% to 6% of the loan. Your Loan Estimate lists the real figures. Ask the lender for it before you decide.

This tool covers a standard rate-and-term refinance with fixed-rate loans. It does not model a cash-out refinance, a loan with mortgage insurance that you want to remove, or the tax effect of the mortgage interest deduction, which helps only if you itemize.

Formula Explained

monthly payment = loan x r / (1 - (1 + r)^-n), where r is the rate / 12 and n is the number of monthly payments. It is worked out for the old loan (balance, rate, years left) and the new loan (balance plus any rolled-in costs, new rate, new term).

monthly savings = old payment - new payment and break-even months = closing costs / monthly savings.

position when you leave = (old payments + old balance owed) - (new payments + new balance owed + closing costs paid in cash), counted at the number of months you plan to stay.

Assumptions and limits

• Both loans are fixed-rate with equal monthly payments. The current payment is worked out from your balance, rate and years left, so it matches your statement only if the loan has been paid on schedule.
• Principal and interest only. Taxes, insurance, mortgage insurance and any prepayment penalty are not included.
• Closing costs are paid in cash on the closing date, or added to the new loan if you choose that option. They are not tax deductible in this estimate.
• You stay in the home for the number of years you enter and then sell or pay off the loan.