Refinance Calculator

How Mortgage Refinancing Works

Refinancing replaces your existing home loan with a new mortgage, typically to secure a lower interest rate, change the loan term, or access home equity as cash. The new lender pays off your current loan balance, and you begin making payments under the new terms. Closing costs, discount points, and any cash-out amount all affect whether refinancing saves money over time.

Before refinancing, compare your current monthly payment and remaining interest against the proposed loan using our refinance calculator above. For equity-based borrowing without replacing your first mortgage, explore our HELOC calculator or cash-out refinance calculator. To model a standard new purchase mortgage, use our EMI calculator. To find how many months until closing costs are recovered from lower payments, use the refinance break even calculator.

When Refinancing Makes Financial Sense

Refinancing is worthwhile when the long-term savings outweigh upfront closing costs within a timeframe you plan to keep the home. Common scenarios include:

• Rate reduction: Market rates have dropped 0.5% to 1.0% or more below your current APR, and you expect to stay in the home past the break-even point.
• Term shortening: You refinance from a 30-year to a 15-year loan to eliminate interest faster, accepting a higher monthly payment for lower total cost.
• Removing PMI: You have reached 20% equity and want to refinance into a conventional loan without private mortgage insurance.
• Cash-out needs: You tap equity for home improvements, debt consolidation, or other major expenses while resetting loan terms.

The Mathematics of Mortgage Refinancing

Monthly payments on a fixed-rate mortgage follow the standard amortization formula:

Where $P$ is the loan principal, $r$ is the monthly interest rate ($r = \frac{\text{APR}}{1200}$), and $n$ is the number of monthly payments remaining or on the new loan.

Worked Example

Suppose you owe $200,000 at 7.00% APR with roughly 21.5 years (258 months) remaining. Your current monthly payment is about $1,497. A refinance into a new 30-year loan at 5.50% APR on the same $200,000 balance produces a monthly payment of about $1,136, saving roughly $361 per month.

With $3,000 in closing costs and no discount points, the break-even point is about 9 months ($3,000 / $361). Over the remaining life of the current loan, you would pay roughly $186,000 in remaining interest versus about $209,000 on the new 30-year loan, so extending the term can increase total interest even when the monthly payment drops. Always compare total lifetime cost, not just the monthly payment.

Understanding Closing Costs and Discount Points

A Loan Estimate (formerly known as a Good Faith Estimate) itemizes lender fees, title charges, prepaid taxes, and insurance. Discount points are upfront fees paid at closing to reduce your interest rate; one point equals 1% of the loan amount. Points make sense when you plan to keep the loan long enough for the monthly savings to exceed the upfront cost.

Break-even on closing costs is calculated as:

Two Ways to Enter Your Current Loan

If you know your remaining balance and current monthly payment, the calculator infers how many payments are left using the inverse amortization formula. If you know the original loan amount, original term, and time remaining, it computes the remaining balance from the amortization schedule. Both methods produce the same comparison once the remaining principal and term are established.

Frequently asked questions