How refinancing works
Refinancing means replacing your current loan with a new one — usually at a lower interest rate, sometimes with a different term — and using the new loan to pay off the old one in full. Your balance stays the same on day one; what changes is the price you pay for it every month after. People refinance to cut their monthly payment, to pay less interest over the life of the loan, to shorten the term and own their home sooner, or to switch from an adjustable rate to the certainty of a fixed one. The catch is that a new loan is not free: lenders charge closing costs — application, appraisal, title and origination fees that commonly run to a few thousand dollars — and those costs decide whether the refinance is genuinely a bargain or just a lower payment bought at a high price.
The break-even formula
Where the monthly saving is your current payment minus the new payment. Until the break-even month, you are still behind: the closing costs exceed everything you have saved. After it, every month is genuine profit. This calculator also shows a lifetime saving figure — your current loan's total interest minus the new loan's total interest and the closing costs — which compares interest over each loan's own full term, so it rewards a shorter new term and punishes a longer one.
Worked example
You owe $200,000 at 6.5% with 240 months (20 years) left, and you can refinance to 4.5% over a new 20-year term with $4,000 of closing costs. Your payment falls from $1,491.15 to $1,265.30 — a saving of $225.85 a month. The break-even point is $4,000 ÷ $225.85 = 17.7, rounded up to 18 months: stay in the loan longer than that and you are ahead. Over the full terms, interest falls from $157,875.11 to $103,671.70, so even after the $4,000 of costs the lifetime saving is $50,203.40.
When refinancing helps — and when it hurts
- The rate gap. The old rule of thumb said refinance for a 1% drop; the real test is the break-even math above — a smaller drop can still pay on a large balance, and a big drop can fail on a small one with high fees.
- How long you will stay. If you may sell or move before the break-even month, the closing costs are money lost. The longer you keep the new loan, the more the lower rate compounds in your favour.
- Resetting the clock. Refinancing a loan with 20 years left into a fresh 30-year term slashes the payment — but you have added ten years of payments. The lifetime saving figure on this page exposes that trade: a lower payment with a higher total interest bill is a worse loan wearing a friendlier mask.
- Cash-out refinances. Borrowing extra against your home raises the balance; run this calculator on the new, larger balance and weigh the extra debt honestly.
Worked example
You owe $200,000 at 6.5% with 20 years left. Refinancing to 4.5% over 20 years with $4,000 of closing costs cuts the payment from $1,491.15 to $1,265.30, saving $225.85 a month. You recover the closing costs in 18 months, and the lifetime interest saving after costs is $50,203.40. Sell the home in the first year, though, and you would have paid $4,000 to save about $2,700 — a loss. Timing is the whole decision.
How to use this calculator
- Enter your current loan balance — the amount you still owe today, not what you originally borrowed.
- Enter your current rate and how many months are left on the loan.
- Enter the new rate you have been quoted and choose the new loan's term in years.
- Add the full closing costs of the new loan — ask the lender for the complete figure, not just the headline fee.
- Check the break-even month first: only refinance if you will keep the loan well past it, then confirm the lifetime saving is positive.
Refinancing vs paying extra on your current loan
A lower rate is not the only way to cut interest. Keeping your current loan and paying extra toward principal each month also reduces total interest — with no closing costs and no break-even wait — though it does not lower your required payment. Compare the two honestly: model extra payments on your existing loan with the Loan Calculator, and model the full schedule of either option with the Amortization Calculator. If the refinance still wins after its costs, it is usually the stronger move; if the gap is small, the fee-free extra-payment route often is.
Watch the term you choose
Lenders love quoting the payment on a fresh 30-year term because it looks dramatically lower. Before you sign, run the same refinance at the term that matches your remaining years — 20 years in the example above — and compare lifetime savings, not just payments. Shortening the term as you refinance is how a refinance turns into a genuine wealth move instead of a longer, cheaper-feeling debt.