Understand your refinancing decision
Refinancing a mortgage can lower your monthly payments or shorten your loan term, but closing costs eat into those savings. This calculator shows whether refinancing makes financial sense by comparing your current loan against a new one, then telling you exactly how many months it takes to recover the upfront costs through monthly payment reductions.
How it works
The calculator runs two parallel amortization schedules: one for your existing mortgage and one for the proposed refinance. It computes the new monthly payment under the refinance terms, subtracts it from your current payment to find your monthly savings, then divides total closing costs by those savings to find your break-even point in months.
If you plan to stay in the home longer than the break-even period, refinancing is typically worthwhile. If you're likely to sell or move sooner, the closing costs may not be recovered.
The formula
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n − 1] where P = loan balance, r = monthly rate, n = number of months; Break-even (months) = Closing Costs ÷ Monthly Savings
Worked example
Assume you have a mortgage with these details:
- Current balance: $300,000
- Current rate: 5.5% per year
- Years remaining: 20 years (240 months)
- New rate: 4.2% per year
- New term: 20 years (240 months)
- Closing costs: $3,500
Step 1: Calculate current monthly payment
Monthly rate = 5.5% ÷ 12 = 0.458333% = 0.00458333
Payment = 300,000 × [0.00458333(1.00458333)^240] / [(1.00458333)^240 − 1]
Payment = 300,000 × [0.00458333 × 2.9145] / [1.9145]
Payment ≈ $1,909.66
Step 2: Calculate new monthly payment at refinance rate
Monthly rate = 4.2% ÷ 12 = 0.35% = 0.0035
Payment = 300,000 × [0.0035(1.0035)^240] / [(1.0035)^240 − 1]
Payment = 300,000 × [0.0035 × 2.2878] / [1.2878]
Payment ≈ $1,753.19
Step 3: Calculate monthly savings
Monthly savings = $1,909.66 − $1,753.19 = $156.47
Step 4: Calculate break-even point
Break-even months = $3,500 ÷ $156.47 = 22.4 months (just under 2 years)
If you remain in the home beyond month 23, you'll recoup the closing costs and begin netting savings. Over 20 years, you'd save approximately $37,552 in principal and interest.
Common mistakes
Ignoring the break-even timeline: Many borrowers focus only on the monthly payment reduction and overlook how long it takes to recover closing costs. If you're likely to relocate within two years, refinancing may leave you underwater on the deal.
Forgetting to account for all costs: Closing costs often include appraisal, title insurance, origination fees, and attorney fees. Use the full amount, not just the lender's fee.
Extending the loan term: Refinancing into a longer term can make monthly payments look better but may cost you far more in total interest. In the example above, if you refinanced into 25 years instead of 20, your new payment would drop further—but you'd pay interest for an extra 5 years, negating much of the benefit.
Overlooking prepayment penalties: Some mortgages charge a penalty for early payoff. Check your current loan documents; if a penalty applies, add it to your closing costs before calculating break-even.
This calculator provides an estimate based on fixed rates and does not constitute financial or legal advice. Consult a mortgage professional or financial advisor before refinancing.