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When people ask how to calculate refinance savings, they usually mean three different numbers, and it helps to keep them apart. The first is the monthly saving: how much less you pay each month. The second is the break-even point: how many months it takes for those savings to repay what the refinance cost. The third is the total interest saved over the life of the loan, after costs. A refinance can look good on one and bad on another. A longer term can lower the monthly payment and still raise the total interest, for example.
This guide shows how to calculate each by hand, with a worked example, so you can check any quote. If you would rather skip the arithmetic, the free Mortgage Refinance Calculator does all three at once, and the Refinance Break-Even Calculator focuses on the payback month.
Step 1: Gather the numbers
You need six figures. Your loan statement shows the first three, and a lender's Loan Estimate shows the rest.
- Current balance, not the original loan amount.
- Current interest rate and the years left on your loan.
- New interest rate and the new term in years.
- Total closing costs, including any discount points. Use the all-in figure from the Loan Estimate.
- How long you expect to keep the loan or the home.
Step 2: Calculate the old and new monthly payment
The principal and interest payment on a fixed-rate loan comes from one formula. With P as the loan amount, r as the monthly rate (the annual rate divided by 12, as a decimal) and n as the number of monthly payments:
Calculate it twice, once for your current loan and once for the new one. The new loan amount is your balance, plus any costs you choose to roll in. The difference between the two payments is your monthly saving. If the new payment is higher, as it is on a shorter term, the "saving" is negative, and the benefit comes from interest instead.
Worked example
Current payment: 300,000 at 7.0% over 336 months is about 2,039 a month.
New payment: 300,000 at 6.0% over 360 months is about 1,799 a month.
Monthly saving: about 240.
That is the headline number most lenders quote. The next steps test whether it is worth the 6,000.
Step 3: Find the break-even point
The simple version divides the cost by the monthly saving: 6,000 ÷ 240 is about 25 months, a little over two years. If you will keep the loan for longer than that, the refinance pays for itself. If you may move or refinance again within two years, it does not.
The simple method is a good first check, and it matches a month-by-month calculation here. It needs care in three cases. If you roll the costs into the loan, there is no cash cost on day one, so the saving must also cover the extra interest on the larger balance, and the break-even is later than the simple method says. If you change the term, a lower payment can come from stretching the loan rather than from a better rate. And if you pay points, the points are part of the cost, which is why the Closing Costs Calculator compares options with and without them.
Step 4: Calculate the total interest saved
The break-even says when you recover the cost. The total interest says whether you are better off over the whole loan. To find it, add up the interest on each loan from today, then compare.
New 30-year loan: about 347,500 of interest.
Difference: about 37,500, less the 6,000 of closing costs, so about 31,500 saved over the life of the loan.
The saving looks large because the rate is a full point lower, even though the loan is two years longer. If the homeowner took a 15-year loan at 5.25% instead, the payment would rise to about 2,412, but the total interest would fall to about 134,000, and the saving after costs would be about 245,000. The trade-off between payment and total cost is the main reason to compare several terms, which the Refinance Loan Term Calculator does side by side.
What changes if you roll the costs into the loan
Many lenders let you add closing costs to the balance. That avoids a cheque on closing day, but it has three effects. The new loan is larger, so the payment is slightly higher. You pay interest on the costs for as long as you hold the loan. And the break-even moves later, because the saving has to repay the costs and the interest on them.
With the example above, rolling in 6,000 raises the new loan to about 306,000 and the payment by about 36 a month, so the saving drops from about 240 to about 204. The simple method now gives 6,000 ÷ 204, which is about 29 months, and a month-by-month calculation that counts the interest on the added balance is later still. If you plan to move in two or three years, paying the costs up front or choosing a lender credit may be better than rolling them in.
Common mistakes when calculating refinance savings
- Comparing the wrong terms. A new 30-year loan against 20 years left will always show a lower payment, even at the same rate.
- Ignoring the time you will stay. A break-even of four years does not help if you sell in three.
- Leaving out points and fees. Use the all-in cost, not just the lender's headline fee.
- Counting escrow deposits as a cost. They are your money, not a fee.
- Forgetting insurance. If your mortgage insurance changes, include it, since the Remove PMI Refinance Calculator and the FHA, VA and USDA Streamline Refinance Calculator handle it.
- Assuming a lower rate means savings. A small rate drop with high costs can lose money.
Rules of thumb, and why to test them
You may hear that a refinance is worth it if the rate falls by one percentage point, or if you can recover the costs within two to three years. These rules give a rough guide, but they are not laws. A one-point drop on a small balance may not repay the costs, while a half-point drop on a large balance can. The break-even depends on the balance, the costs and how long you stay, so run your own numbers rather than relying on a rule.
The same applies to the question of how low a rate needs to fall. The Mortgage Refinance Calculator includes a tab that finds the highest new rate that still breaks even within a period you choose, which answers the question for your loan directly.
Comparing terms: payment, interest and payoff date
A refinance can change the term as well as the rate, and the term often matters more than the rate. Shortening the term raises the payment but cuts the interest sharply. Lengthening it lowers the payment but costs more interest in total. A useful middle path is to refinance into a longer term for the lower required payment, then keep paying your old amount, which clears the loan sooner while giving you the option to pay less in a hard month.
When you compare offers, line them up by payment, total interest after costs and the date you would be debt free. The Refinance Loan Term Calculator compares five terms at once, each at its own rate, which is the quickest way to see this trade-off.
A quick checklist before you decide
- Calculate the monthly saving and the break-even in months.
- Compare the break-even with how long you will keep the loan.
- Check the total interest over the life of the loan, after costs.
- Compare at least two terms and two rate-and-fee combinations, including one with points and one without.
- Ask each lender for a Loan Estimate on the same day so rates are comparable.
- Test a higher and a lower rate, since the rate may move before you lock.
Related guides and tools
More from Utiliby on refinancing:
- Is Mortgage Refinance Interest Tax Deductible?: how interest, points and cash-out money are taxed.
- Refinancing with Bad Credit, Self-Employed Income or Negative Equity: if your credit, income or equity is a problem.
- Mortgage Refinance by State: Costs and Taxes: how costs and taxes differ by state.
Free tools:
- Mortgage Refinance Calculator: the full comparison.
- Remove PMI Refinance Calculator: if mortgage insurance is part of your payment.
- Rental Property Refinance Calculator: for an investment property.
Sources
- Consumer Financial Protection Bureau, "Should I refinance my mortgage?" and "What are closing costs?" (consumerfinance.gov/ask-cfpb).
- Consumer Financial Protection Bureau, Know Before You Owe: Loan Estimate (consumerfinance.gov).
- Federal Reserve Board, Consumer Handbook on Adjustable-Rate Mortgages, on loan payments and amortization (federalreserve.gov).
Frequently asked questions
How do I calculate my refinance savings?
Work out your current and new monthly payments, subtract to get the monthly saving, then divide the closing costs by that saving to find the break-even in months. For the full picture, also compare total interest over the life of each loan, after costs.
What is the formula for a mortgage payment?
Payment = P × r ÷ (1 − (1 + r)^−n), where P is the loan amount, r is the monthly interest rate and n is the number of payments. The calculator on this site uses the same formula.
How do I calculate the break-even point on a refinance?
Divide the total cost of the refinance by the monthly saving. The result is the number of months to recover the cost. If you roll costs into the loan, the real break-even is later, because the savings must also cover the interest on the extra balance.
How long should I stay to make a refinance worth it?
At least until the break-even month, and ideally well past it. Many people look for a break-even of around two to three years, but the right answer depends on your plans.
Is a lower monthly payment always a saving?
No. A longer term can lower the payment and raise the total interest. Compare the total interest over the life of the loan, after costs, as well as the monthly payment.
Should I include escrow deposits in the cost?
No. Escrow deposits and prepaid interest are your own money, so they are not a cost of refinancing, though you need the cash on closing day.
How do points change the calculation?
Points are part of the cost, and they lower the rate. Add them to the cost and use the lower payment, then check the break-even. A point makes sense only if you keep the loan long enough to recover its cost.
What if I roll the closing costs into the loan?
The loan is larger, so the payment and the interest are higher, and the break-even is later. The saving must repay the costs and the extra interest, so compare it with paying the costs up front.
How do I compare a 15-year and a 30-year refinance?
Compare the payment, the total interest and the break-even for each. A 15-year loan usually has a higher payment and a much lower total interest. The term calculator compares several terms side by side.
Do I need a calculator, or can I do this by hand?
You can do it by hand with the formula above, but a calculator is faster and avoids mistakes, particularly for the month-by-month break-even and the total interest. The free tools on this site run in your browser and store nothing.