How the comparison works
For every month from today, the calculator adds up everything you'd have paid on each loan plus what you'd still owe on it: what either choice has cost you if you sold the house that month. The refinance also carries any closing costs you paid in cash, and gets credit for any cash you took out. The refinance breaks even the first month its total drops below the current loan's.
The usual rule of thumb divides the closing costs by the monthly saving. It's quick, but it misses that a new loan starts over with mostly-interest payments, so it pays down principal more slowly, and that a lower payment can come from a longer term rather than a better rate. The calculator shows both answers when they differ by six months or more.
Examples
You owe $300,000 at 7.5% with 28 years left, a payment of $2,138.60. A new 30-year loan at 6.25% with $5,000 of closing costs paid in cash costs $1,847.15 a month, about $291 less. It breaks even after 1 year and 5 months, and if you keep it 7 years you're about $20,400 ahead. Refinancing to 15 years at the same rate raises the payment to $2,572.27, but puts you about $35,600 ahead after 7 years and about $250,000 ahead over the life of the loan.
Starting from that same loan and new rate, here is what the other inputs do:
- Costs added to the loan. Tick the box and the new loan is $305,000, with a payment of $1,877.94. You pay nothing at closing, but it breaks even a month later, after 1 year and 6 months, and you're about $18,300 ahead after 7 years instead of $20,400: the difference is interest on the $5,000.
- One point for a lower rate. Suppose one point, $3,000, bought 6.0% instead of 6.25%. The payment drops to $1,798.65, but with $8,000 of costs the break-even moves out to 1 year and 10 months. After 7 years you're about $22,600 ahead, only about $2,300 more than without the point. Over the whole loan the gap is larger, about $63,100 ahead against $48,600.
- A smaller rate drop. At 7.0% instead of 6.25%, the payment is $1,995.91, about $143 less. The rule of thumb says 3 years to break even; counting principal, it takes 3 years and 6 months, and after 3 years you'd be about $650 behind. Kept 7 years it's about $4,500 ahead. Kept longer than 27 years and 6 months, the extra two years of payments put it behind for good, about $5,000 over the whole loan.
Example: when a lower payment isn't a saving
You owe $200,000 at 6.5% with 20 years left, a payment of $1,491.15. A new 30-year loan at 6.0% costs $1,199.10, about $292 a month less, and the rule of thumb says the $5,000 of costs are paid back in 18 months. In fact the refinance never breaks even. Most of the lower payment comes from spreading the balance over 10 more years, not from the rate, so the balance falls more slowly. After 7 years you'd be about $3,000 behind, and over the whole loan about $78,800 behind.
Keep the new term at 20 years and the picture changes. The payment is $1,432.86, only about $58 less, but the refinance breaks even after 5 years and 2 months and is about $9,000 ahead over the life of the loan. The rule of thumb would have said 7 years and 2 months. If you want the lower payment for your budget, that can still be a reason to refinance, as long as you know what it costs.
Things to check
- How long you'll stay. If you'll move before the break-even month, refinancing loses money.
- Resetting the clock. Starting a new 30 years on a loan with 25 left lowers the payment, but can cost more interest in the end. The calculator warns when the refinance falls behind for good.
- Points. Each point costs 1% of the loan and buys a lower rate. It's only worth it if you keep the loan well past the break-even.
- Rolling costs into the loan. Adding closing costs to the balance means paying interest on them, which the calculator counts when the box is ticked.
- Cash out. Borrowing more than you owe raises the balance, and the rate offered may be higher. Enter the rate you're quoted for the cash-out loan. The cash you receive is counted in the comparison.
- Real figures. Enter the rate, points and closing costs from each lender's Loan Estimate, which it must give you within three business days of your application.
- Fixed rates only. Both loans are treated as fixed-rate loans. To weigh an adjustable-rate loan, use the ARM calculator or compare mortgages.
The comparison is principal and interest only: property tax and homeowners insurance don't change when you refinance. If the new loan would need mortgage insurance, add it to your estimate of the new payment.
If what you want is to pay the loan off sooner without new closing costs, compare the refinance with paying extra on the loan you have, in the extra payment calculator.
Common questions
How do I work out the break-even point?
The quick version divides the closing costs by the monthly saving. The calculator also counts the principal each loan pays down, so it shows the month you're actually ahead, and the quick version alongside when they differ by six months or more.
Is it worth refinancing for a lower rate?
It depends on the size of the drop, the costs, the new term and how long you'll keep the loan, not on the rate alone. In the examples above, a drop from 7.5% to 6.25% is ahead within a year and a half; a drop to 7.0% takes three and a half years.
How much does it cost to refinance?
It varies by lender, loan and state. Your Loan Estimate lists every cost; enter the total, apart from points, as closing costs.
Does refinancing restart my loan?
Yes. The new loan has its own term, starting from your balance today. Choosing a term close to the time you have left keeps your payoff date about where it is.
Should I pay points?
Enter the rate with and without points and compare the break-even month and the savings for the years you'll keep the loan. Points pay back only if you keep it long enough.