How to tell whether a refinance is worth it
A refinance replaces your current loan with a new one, usually at a lower rate. The catch is that the new loan comes with closing costs. The break-even point is how long it takes for what you save to pay back what you spent. This calculator finds that point, and it also shows something a simple "months to recover costs" figure hides: what happens if the new loan is longer than the time you have left on the old one.
The formulas, and what every variable means
payment = P × r ÷ (1 − (1 + r)−n)
simple break-even (months) = closing costs ÷ (old payment − new payment)
cost so far = interest paid to date (+ closing costs, for the refinance)
| Symbol | Meaning | How it is found |
|---|---|---|
| P | The amount borrowed | Your balance today, plus the closing costs if you roll them into the new loan |
| r | Monthly interest rate | Annual rate ÷ 12 ÷ 100 (6.25% becomes 0.005208) |
| n | Number of monthly payments | Years × 12. Use the time you have left for the old loan. |
| Closing costs | Fees to arrange the new loan | The total on the lender's Loan Estimate |
| Cost so far | What each choice has really cost you at a given month | Interest paid in all the months up to then, plus the closing costs for the refinance |
The principal you repay is not counted as a cost, because it builds your equity whichever loan it goes to. That is why the calculator compares interest and closing costs, and why rolling the costs into the loan does not change the cost picture much: you pay interest on them, and the payment goes up a little.
Worked example 1, by hand: $280,000 at 7.25%
You owe $280,000 at 7.25% with 27 years left. A lender offers 6.25% over 25 years, slightly shorter than the time you have left, so you would not be stretching your debt. The closing costs are $5,600, paid in cash.
- Payment now: $280,000 at 7.25% over 324 months = $1,971.74.
- Payment after refinancing: $280,000 at 6.25% over 300 months = $1,847.07.
- Monthly saving: $1,971.74 − $1,847.07 = $124.67.
- Payback from the lower payments alone: $5,600 ÷ $124.67 ≈ 44.9 months.
- Counting the interest actually paid under each loan, the refinance has cost less than keeping the old loan from month 24 (2 years).
Why are the two answers so different? The lower rate cuts your interest by about $233 in the first month ($280,000 × 1.00% ÷ 12), which is more than the $125 payment saving. The difference is that the new loan is also a little shorter, so more of each payment goes to principal. That is not lost money. It lowers what you owe and builds equity, so the calculator counts it. The payment-only figure ignores it. The calculator's main answer, 24 months, is the point where the refinance has cost you less in interest and closing costs. It matters most if you might sell, because the equity comes back to you then. The payment-only figure, 45 months, is the cash-flow view: when your lower payments have refunded the closing costs out of your monthly budget. Both are shown in the results.
Over both full loans the refinance saves $79,123 after the $5,600 of costs, and if you keep the loan 7 years it saves $15,174.
Worked example 2: pay the costs in cash, or roll them into the loan
| Costs paid in cash | Costs rolled into the loan | |
|---|---|---|
| New loan amount | $280,000 | $285,600 |
| Cash needed at closing | $5,600 | $0 |
| New monthly payment | $1,847.07 | $1,884.02 |
| Monthly saving | $124.67 | $87.73 |
| Break-even | 24 months | 27 months |
Rolling the costs in means nothing to pay at the closing table, and the break-even is only slightly later. The trade is that you borrow more and keep paying interest on the costs for the life of the loan. If you have the cash and expect to keep the loan a long time, paying up front is usually the cheaper route.
Worked example 3: the trap of starting the clock again
You owe $200,000 at 6.5% with 20 years left. A lender offers 6% on a new 30-year loan with $4,000 of closing costs.
| New 30-year loan | New 20-year loan | |
|---|---|---|
| New monthly payment (now $1,491.15) | $1,199.10 | $1,432.86 |
| Monthly saving | $292.05 | $58.28 |
| Break-even | Never | 49 months |
| Saving over both full loans | −$77,801 | $9,988 |
The 30-year loan looks attractive because the payment falls by $292 a month. The quick sum, $4,000 ÷ $292, says the costs come back in about 14 months. Yet it never pays back its closing costs and costs $77,801 more in the end, because you are borrowing for ten extra years. The loan at the same 20-year term saves less each month, but it does break even, after 49 months, and finishes ahead. A lower payment can be worth paying for if you need the breathing room, but it is a different decision from saving money, and this calculator shows you which one you are making.
Worked example 4: how big does the rate drop need to be?
The main example, with four different new rates:
| New rate | New payment | Break-even | Saving after 7 years |
|---|---|---|---|
| 6.75% | $1,934.55 | 46 months | $5,465 |
| 6.25% | $1,847.07 | 24 months | $15,174 |
| 5.75% | $1,761.50 | 16 months | $24,823 |
| 5.25% | $1,677.89 | 12 months | $34,407 |
A bigger drop pays back faster and saves more. A small drop with the same closing costs can take so long to break even that it is only worth it if you are sure to stay. Get quotes from more than one lender, since the closing costs and the rate both change the answer, and enter each offer to compare them.
Common mistakes to avoid
- Comparing only the monthly payment. A lower payment on a longer loan can cost far more overall.
- Forgetting how long you will stay. If you move before the break-even point, the refinance loses money.
- Leaving out closing costs. Use the total on the lender's written Loan Estimate.
- Using the original term. Enter the years you have left on the current loan, not the original length.
- Refinancing over and over. Every refinance restarts the costs and can restart the clock.
Once you have a real quote, see what the new payment would include with the mortgage calculator, and compare shorter and longer terms with the 15 vs 30 year mortgage calculator.
Sources and review
The payment formula is the standard fixed-rate amortization formula. The break-even month is checked against an independent closed-form calculation in our test suite. The idea of dividing refinancing costs by the monthly saving to find the break-even period, the two kinds of "no-cost" refinancing (a higher rate, or costs rolled into the loan), and the warning that refinancing late in a loan restarts the amortization, are all explained in the Federal Reserve Board, A Consumer's Guide to Mortgage Refinancings. It is an older guide, so its fee names predate the current Loan Estimate, but the arithmetic is unchanged. On weighing points against how long you will keep the loan, see the CFPB on lender credits and points. Last reviewed September 2026. Comparing quotes from several lenders? Use the loan offer comparison calculator. Read about our methodology.