Quick answer
A refinance calculator compares your current loan with a new one and finds the break-even point. Refinancing a $320,000 balance from 7.5% with 27 years left to 6.0% over 30 years cuts the payment from $2,306 to $1,919 — saving $388 a month — so $6,000 of closing costs are recovered in 16 months. Stay longer than that and the refinance pays; move sooner and it loses money.
How the Refinance Calculator works, step by step
Enter your current balance, current rate and remaining term, then the new rate, new term and the closing costs of the new loan. The calculator computes both payments, the monthly saving, and divides the costs by the saving to get break-even in months. It also totals the remaining interest on each loan, so you can see the lifetime picture alongside the monthly one.
Watch the term reset. Refinancing 27 remaining years into a new 30-year loan lowers the payment partly by stretching the debt, not only by cutting the rate. The new loan's total interest is about $370,682 against $427,257 remaining on the current loan — a genuine lifetime saving here of $50,575 after costs, but smaller than the monthly saving suggests. Refinance into 27 years instead (payment $1,996.75) and total interest falls to $326,948, a lifetime saving of $94,309.
Costs can be quoted three ways: paid in cash, rolled into the loan (raising the balance), or covered by a higher rate in a 'no-cost' refinance. The maths only works if you count them. Rolling $6,000 into the example loan raises the balance to $326,000 and the payment to about $1,955 — the saving shrinks to $352 a month, and the lifetime cost rises because you pay interest on the costs too.
The old rule that a refinance needs a 1% rate drop is too crude — what matters is the dollar saving against the costs and how long you will keep the loan. On a $320,000 balance, even 0.5% saves about $105 a month and can break even in under five years. On a $120,000 balance the same half point saves about $40 a month and may never repay $6,000 of costs. Run your own numbers.
The refinance also restarts the amortisation clock on interest. In the first year of the new 30-year loan, most of each payment is interest again — the same front-loading you escaped by paying down the old loan for three years. That is the hidden cost of the term reset, and it is why matching the remaining term, or shorter, is usually the better refinance even when the payment saving is smaller.
The formula
Monthly saving = current payment − new payment. Break-even months = total closing costs ÷ monthly saving. Payments from: Payment = Balance × [r(1 + r)^n] ÷ [(1 + r)^n − 1]. Lifetime saving = remaining interest on the current loan − (interest on the new loan + closing costs).
Worked example — try it on the calculator above
Worked example: $320,000 from 7.5% to 6.0%
Current: $320,000 at 7.5% with 27 years (324 payments) left — payment $2,306.35, remaining interest about $427,257. New: $320,000 at 6.0% over 30 years — payment $1,918.56. Monthly saving $387.79; closing costs of $6,000 break even at 16 months. Lifetime saving after costs: $50,575. Refinance instead into 27 years at 6.0% (payment $1,996.75) and total interest falls to about $326,948 — a lifetime saving of $94,309 on a smaller monthly saving of $309.60, with break-even at 20 months.
Frequently Asked Questions
How much rate drop justifies a refinance?
The old rule of 1% is too crude — what matters is the dollar saving against the costs and how long you will keep the loan. On a $320,000 balance, even 0.5% saves about $105 a month and can break even in under five years. On a $120,000 balance the same half point saves about $40 a month and may never repay $6,000 of costs. Run your own numbers.
What do refinance closing costs typically include?
Lender fees (origination, underwriting), appraisal, title insurance and search, recording fees, and prepaid escrows for tax and insurance. Total costs commonly run 2% to 5% of the loan amount, though competition and state title costs move this widely. You receive a Loan Estimate within three business days of applying — compare the 'services you cannot shop for' and lender fees between lenders.
Does refinancing hurt my credit score?
Briefly, by a small amount: a hard inquiry and a new account typically cost a few points, recovering within months. Rate-shopping for a mortgage within a 14- to 45-day window counts as a single inquiry under FICO and VantageScore models, so gather quotes together. The far larger score factor is continuing to pay every existing account on time.
What is a cash-out refinance and when does it make sense?
You borrow more than the current balance and take the difference in cash. It can be rational for consolidating much more expensive debt or funding home improvements, because mortgage rates are usually the cheapest borrowing available. It converts unsecured debt into debt secured on your home, however, and cash-out pricing is slightly worse than rate-and-term pricing — the discipline to not re-run the cards is the real cost.
Estimates, not advice. This calculator provides educational estimates based on the inputs you enter and the assumptions shown on this page. It is not financial, tax or investment advice, and it cannot see your full situation. Verify important figures against official sources, and consider a qualified professional for decisions about your own money. See our Disclaimer and Methodology.