How to tell whether refinancing pays off
Refinancing replaces your mortgage with a new loan, ideally at a lower rate. The new lender pays off the old balance, and you start a fresh schedule of payments. It usually costs money up front — appraisal, title, origination and recording fees — so the question is whether the lower rate saves more than those costs, and how soon.
The calculator answers that in three ways:
- Monthly savings — the difference between your current principal-and-interest payment and the new one.
- Break-even month — how long you need to keep the new loan before the savings cover the closing costs. If you expect to sell or refinance again sooner, the refinance loses money.
- Lifetime difference — total interest on the new loan plus the closing costs, compared with the interest left on your current loan. This is where a longer term shows its cost.
Enter your balance and rate from your latest mortgage statement, the time left on the loan, and the rate, term and estimated closing costs from the lender’s Loan Estimate.
The formulas behind the comparison
Both payments use the standard fixed-rate loan formula:
M = P × r ÷ (1 − (1 + r)⁻ⁿ)
- M
- monthly principal and interest payment
- P
- amount owed: the current balance, or the new loan amount (balance + cash out, + closing costs if added to the loan)
- r
- annual interest rate ÷ 12, as a decimal
- n
- months left on the current loan, or months in the new term
The quick break-even estimate divides the costs by the monthly saving:
Break-even (months) = closing costs ÷ (current payment − new payment)
The second break-even figure is stricter. Each month it compares the total cost of both paths so far, including the balance you would still owe:
Keep = payments so far + current balance · Refinance = costs paid + new payments so far + new balance − cash out
Refinancing breaks even in the first month when Refinance ≤ Keep. The difference matters when the new loan is longer: a 30-year loan repays principal more slowly than one with 27 years left, so part of the lower payment is simply debt paid later, not money saved. Every payment and interest charge is rounded to the cent, month by month.
Worked example
You owe $300,000 at 7.25% with 27 years left. A lender offers 6% for 30 years with $6,000 in closing costs, paid at closing.
- Current payment: $300,000 at 7.25% ÷ 12 over 324 months = $2,112.58
- New payment: $300,000 at 6% ÷ 12 over 360 months = $1,798.65
- Monthly savings: $2,112.58 − $1,798.65 = $313.93
- Simple break-even: $6,000 ÷ $313.93 = 19.1, so month 20. The balance-aware check also lands in month 20.
- Interest left on the current loan: $384,477.94. Interest on the new loan: $347,515.44.
- Lifetime difference: $347,515.44 + $6,000 − $384,477.94 = −$30,962.50, a saving of $30,962.50
The refinance saves money here even though it adds three years. At a smaller rate cut the longer term can flip the result: refinancing $300,000 with 20 years left at 7.25% into a 30-year loan at 7% lowers the payment but raises total interest.
Things to weigh before refinancing
- How long you’ll stay. If you are likely to move before the break-even month, the closing costs are not recovered.
- Resetting the clock. A new 30-year loan on a mortgage you have paid for years spreads the balance out again. Choosing a term close to the time you have left — or keeping your old payment amount and paying the difference as extra principal — keeps the interest saving.
- “No-cost” refinancing. According to the CFPB, lenders cover closing costs either by charging a higher rate or by adding the costs to the loan amount. Use the “Add to the loan” option to see the second case, or enter the higher rate with zero costs for the first.
- Cash-out refinancing. Borrowing extra against your home raises the balance and the interest you pay. The calculator counts the cash as money received and the interest on it as a cost.
- Discount points. Points paid to lower the rate are part of the closing costs; the CFPB suggests estimating their break-even the same way, by dividing their cost by the monthly saving.
Month-by-month detail
To see the full payment schedule of either loan, enter its balance, rate and term in the amortization calculator. For a new purchase with taxes and PMI, use the mortgage calculator.
What this calculator leaves out
- Taxes, homeowners insurance and mortgage insurance, which can change when you refinance.
- Adjustable rates: both loans are treated as fixed for their whole term.
- What else you could do with the closing-cost money (its opportunity cost) and any tax effects of mortgage interest.
- Prepayment penalties on the current loan, which are uncommon but possible; add them to closing costs.
Frequently asked questions
How much does the rate need to drop to make refinancing worth it?
There is no fixed rule. What matters is how quickly the monthly saving repays the closing costs and how long you will keep the loan. A small rate cut on a large balance can pay off quickly; a bigger cut on a small balance may not. The break-even month shows this for your numbers.
What is the break-even point on a refinance?
It is the month when the money saved by the lower payment has covered the refinancing costs. The quick estimate is closing costs divided by monthly savings. The calculator also shows a stricter version that counts the loan balances, which matters when the new term is longer.
Can refinancing cost more even if my payment goes down?
Yes. If the new loan is longer than the time left on your current one, you pay interest for more months. In that case the payment falls but total interest can rise. The calculator warns you when this happens and shows the lifetime difference.
Should I pay closing costs upfront or roll them into the loan?
Paying upfront keeps the loan smaller, so you pay less interest overall. Adding the costs to the loan avoids the cash outlay but you pay interest on them for the whole term. Switch between the two options to compare the difference for your loan.
Does a cash-out refinance save money?
Taking cash out means borrowing more, so it usually raises the payment and total interest. It can still make sense if it replaces more expensive debt, but compare it with the cost of that debt. The calculator treats the interest on the cash as a cost.
Sources
Last reviewed September 19, 2026