Should I Refinance My Mortgage?
Refinancing can make sense when replacing your current mortgage improves your financial position after accounting for the new interest rate, closing costs, loan term, and how long you expect to keep the new loan. A lower refinance rate can reduce your monthly principal-and-interest payment, but the payment change alone does not show whether refinancing will save money overall.
The break-even point matters because refinancing usually involves upfront or financed costs that must be recovered before the new loan creates a financial advantage. Your remaining mortgage term also matters. Replacing a mortgage with 20 or 25 years left with a new 30-year loan, for example, may lower the monthly payment partly because the balance is being repaid over a longer period.
There is no universal rule that refinancing is worthwhile whenever mortgage rates fall by a certain percentage. The result depends on your remaining balance, current rate, proposed refinance rate, closing costs, points, new loan term, and how long you expect to keep the mortgage. Comparing both the shorter-term and lifetime financial impact gives you a more complete picture than looking at the new payment alone.
How to Use the Mortgage Refinance Calculator
Start with your current mortgage balance, interest rate, and remaining loan term so the calculator can estimate the cost of keeping your existing mortgage. Then enter the interest rate, loan term, and estimated closing costs for the refinance you want to compare.
Under Advanced Refinance Options, you can add discount points or cash out and choose whether refinance costs are paid upfront or added to the new loan balance. The results compare your current mortgage with the proposed refinance and show your monthly payment change, estimated break-even point, 5-year financial impact, and lifetime financial impact.
How Mortgage Refinance Savings Are Calculated
Current Mortgage Payment and Remaining Balance
The comparison starts with the amount you currently owe on your mortgage, rather than the amount you originally borrowed. Using the current mortgage balance, interest rate, and remaining loan term, the calculator estimates your monthly principal-and-interest payment and how much principal would remain at different points in the future.
The remaining term is important because each mortgage payment includes both principal and interest, and that mix changes over time. A mortgage with 10 years remaining has a different repayment path than the same balance and interest rate spread over 25 years.
New Refinance Payment
The new refinance payment is estimated using the new loan balance, interest rate, and repayment term you enter. If you are refinancing only the amount needed to pay off your current mortgage, the starting refinance balance is based on that remaining mortgage balance.
The new loan balance can be higher if you choose to take cash out or finance eligible refinance costs instead of paying them upfront. A larger balance generally means more principal must be repaid and can increase the amount of interest paid over time.
Closing Costs and Discount Points
Refinancing costs affect the comparison whether you pay them upfront or finance them into the new mortgage. Costs paid upfront increase the amount you must recover before the refinance becomes financially favorable. If you finance those costs, they are added to the new loan balance and can accrue interest over the repayment term rather than disappearing from the cost of refinancing.
Discount points are another potential upfront refinance cost. In this calculator, one discount point equals 1% of the base refinance amount before closing costs or points are financed. For example, one point on a $350,000 refinance equals $3,500. The calculator does not assume that purchasing a point reduces the mortgage rate by a fixed amount. Instead, enter the interest rate and points associated with the refinance offer you want to evaluate.
Break-Even Point
A common way to estimate refinance break-even is to divide closing costs by the monthly payment savings. That shortcut can be useful for a quick estimate, but it does not account for differences in how quickly the current mortgage and new refinance pay down principal.
This calculator uses a more comprehensive comparison. For each month, it considers the scheduled payments made, remaining mortgage balance, refinance costs, and cash out received when applicable for the two loan scenarios. The estimated break-even point is the first month when the modeled financial position of refinancing becomes at least as favorable as keeping the current mortgage.
Because this approach considers both cash flow and the amount still owed, the estimated break-even may differ from a simple closing-costs-divided-by-monthly-savings calculation. Reaching break-even also does not mean refinancing will necessarily remain less expensive through the full loan term, which is why the calculator separately shows shorter-term and lifetime financial impact.
Loan Term and Remaining Principal
The refinance loan term can change both your monthly payment and your total borrowing cost. If your current mortgage has 20 years remaining and you replace it with a new 30-year mortgage, for example, the new payment may be lower partly because the balance is being repaid over more months, not just because the interest rate is lower.
A longer repayment period can also leave you owing more principal at a future point than you would have owed by keeping the current mortgage. As a result, a refinance can improve your financial position over the next five years while still producing a higher lifetime cost if the new loan is kept until its scheduled payoff.
A shorter refinance term can have the opposite effect: the monthly payment may increase while principal is repaid faster, potentially reducing the amount of interest paid over the life of the loan.
Understanding Your Refinance Results
Monthly Payment Change
Monthly Payment Change compares the estimated principal-and-interest payment on your current mortgage with the payment on the proposed refinance. A result such as $341 less per month means the modeled refinance payment is $341 lower; $341 more per month means it is $341 higher.
This comparison does not include property taxes, homeowners insurance, HOA fees, or other housing expenses. A lower mortgage payment also does not necessarily mean the refinance costs less overall, so consider it alongside the break-even point, financial impact over your selected time horizon, and lifetime financial impact.
Break-Even Point
The estimated break-even point shows how long it takes for the modeled financial position of refinancing to first become at least as favorable as keeping your current mortgage. For example, a 22-month break-even means the refinance first catches up after approximately 22 months under the assumptions entered.
Compare that timeframe with how long you realistically expect to keep the refinanced mortgage. Reaching break-even does not necessarily mean the refinance will remain less expensive through its full term.
5-Year Financial Impact
The 5-Year Financial Impact compares the modeled financial position of keeping your current mortgage with refinancing after five years. The comparison accounts for scheduled payments made, the mortgage balance still remaining, applicable upfront refinance costs, and cash out received when relevant. A positive result indicates an estimated refinance advantage at that point; a negative result indicates an estimated additional cost.
Five years is the calculator's default comparison period, but you can also select 3, 7, or 10 years. A shorter-term comparison may be especially useful if you expect to sell the home, refinance again, or pay off the mortgage before the new loan reaches its scheduled maturity. In those situations, the financial impact at your expected holding period may be more relevant than the lifetime result.
Lifetime Financial Impact
The Lifetime Financial Impact compares the current mortgage and proposed refinance through their respective scheduled payoff periods. It accounts for the remaining payments on the current mortgage and the payments and applicable refinance costs associated with the new loan.
A refinance can lower your monthly payment and show an estimated financial advantage over five years while still producing an additional lifetime cost. This can happen when refinancing extends the repayment period, leaving payments on the new mortgage after the current loan would have been paid off.
The lifetime result is a nominal-dollar estimate. It does not adjust future dollars for inflation or model investment returns, opportunity cost, or potential tax effects.
What Can Change Your Refinance Results?
Small changes in refinance assumptions can produce meaningful differences in the results. A lower interest rate may reduce the new monthly payment, shorten the estimated break-even period, and improve the modeled financial position over shorter or longer periods. A higher rate can have the opposite effect, which is why comparing the actual rates available to you matters.
Closing costs also affect how quickly a refinance can become financially favorable. Lower costs generally reduce the amount the refinance must overcome. The new loan term affects both the monthly payment and how quickly principal is repaid, so a shorter term may increase the payment while potentially reducing lifetime interest.
Your expected holding period is equally important. A refinance that becomes favorable after several years may offer little benefit if you sell the home or refinance again sooner. Discount points can further change the upfront cost and rate combination, while taking cash out increases the amount borrowed. Testing different assumptions can help you understand which factors have the greatest effect on your refinance comparison.
Mortgage Refinance Example
Suppose you have a $350,000 mortgage balance at a 7.25% interest rate with 26 years remaining. You are considering refinancing the balance into a new 30-year mortgage at 6.25%, with $6,000 in closing costs paid upfront, no discount points, and no cash out.
Under these assumptions, the estimated monthly principal-and-interest payment decreases from approximately $2,496 to $2,155, or about $341 less per month. The refinance reaches its estimated break-even point after 22 months. After five years, the modeled comparison shows approximately $10,299 in estimated savings from refinancing.
The lifetime result tells a different story. If both mortgages are followed through their scheduled payoff periods, the refinance produces approximately $3,161 in estimated additional lifetime cost. Although the interest rate is lower, the current mortgage has only 26 years remaining while the refinance starts a new 30-year repayment period. This example shows why a lower payment and positive shorter-term savings do not necessarily mean a refinance will cost less over its full term.
Rate-and-Term Refinance vs. Cash-Out Refinance
A rate-and-term refinance replaces your existing mortgage primarily to change the interest rate, repayment term, or both. If no cash out is taken and refinance costs are paid upfront, the new loan generally begins with the amount needed to pay off the remaining mortgage balance.
A cash-out refinance replaces the existing mortgage with a larger loan and provides part of the additional amount to the borrower as cash. In this calculator, the amount entered as cash out is added to the base refinance balance. That larger balance can affect the new monthly payment, principal remaining over time, interest paid, estimated break-even point, and shorter- and longer-term financial impact.
Frequently Asked Questions About Mortgage Refinancing
When does refinancing a mortgage make sense?
Refinancing may make sense when the potential benefits of the new mortgage outweigh its costs over the period you expect to keep the loan. Consider the new interest rate and monthly payment, closing costs, estimated break-even point, remaining term on your current mortgage, and term of the new loan. A refinance that looks favorable over five years may have a different lifetime result, particularly if it extends repayment. Comparing the refinance over your expected holding period can provide a more useful picture than relying on the interest-rate change or monthly payment alone.
How much lower should my mortgage rate be before refinancing?
There is no universal rule that your mortgage rate needs to fall by 0.5%, 0.75%, 1%, or another specific amount before refinancing makes sense. A smaller rate reduction may still produce a favorable result in some situations, while a larger reduction may not offset the costs of refinancing in others.
The outcome also depends on your remaining mortgage balance, closing costs, discount points, current remaining term, new loan term, and expected holding period. Instead of relying on a rate threshold alone, compare the estimated break-even point and financial impact of the specific refinance terms available to you.
How is the refinance break-even point calculated?
A simple refinance break-even estimate often divides closing costs by monthly payment savings. This calculator uses a more comprehensive approach by comparing the modeled financial positions of your current mortgage and proposed refinance month by month. The comparison considers scheduled payments, remaining principal, refinance costs, and cash out when applicable. The estimated break-even point is the first month when refinancing catches up with or becomes financially favorable compared with keeping the current mortgage under the assumptions entered.
How do closing costs affect refinance savings?
Closing costs generally reduce the financial advantage of refinancing because they add costs that must be recovered through payment savings, principal differences, or other financial benefits of the new loan. If you pay closing costs upfront, you provide that money at closing. If you finance the costs, they are added to the new mortgage balance and can accrue interest over time. Financing closing costs may reduce the cash needed at closing, but it does not eliminate those costs from the refinance comparison.
Is a lower monthly refinance payment always better?
No. A lower refinance payment can result from a lower interest rate, a longer repayment term, or both. Extending the loan term can reduce the required monthly payment while also keeping the mortgage outstanding longer and potentially increasing the total cost over its scheduled life.
Consider the payment change alongside the estimated break-even point, financial impact over your expected holding period, and lifetime financial impact. A lower monthly payment can improve cash flow without necessarily making the refinance less expensive overall.
What happens if I refinance into a new 30-year mortgage?
Refinancing into a new 30-year mortgage starts a new 360-month repayment schedule from the refinance date. If your current mortgage has fewer than 30 years remaining, spreading the refinance balance over a new 30-year term may lower the monthly payment but also extend the scheduled payoff date.
That does not necessarily mean the refinance will cost more overall. A sufficiently lower interest rate could offset some or all of the effect of the longer term. Compare the financial impact over your expected holding period and the lifetime financial impact to evaluate how the term reset affects your specific scenario.
Can refinance closing costs be added to the new mortgage?
Some refinance loans may allow eligible closing costs to be financed into the new mortgage instead of paid upfront, depending on the lender and loan program. Financing those costs increases the new loan balance, which can increase the monthly payment and cause the financed amount to accrue interest over time.
The calculator's Pay upfront / Finance into new loan option lets you compare these approaches. Financing costs changes when and how they are paid, but the costs still remain part of the modeled refinance comparison.
For more information about how calculations on this site are modeled, see our methodology.