Refinance Calculator Formula
Understand the math behind the refinance calculator. Each variable explained with a worked example.
Formulas Used
Current Monthly Payment
current_payment = current_monthly_rate > 0 ? current_balance * current_monthly_rate * pow(1 + current_monthly_rate, current_num_payments) / (pow(1 + current_monthly_rate, current_num_payments) - 1) : current_balance / current_num_paymentsNew Monthly Payment
new_payment = new_monthly_rate > 0 ? current_balance * new_monthly_rate * pow(1 + new_monthly_rate, new_num_payments) / (pow(1 + new_monthly_rate, new_num_payments) - 1) : current_balance / new_num_paymentsMonthly Savings
monthly_savings = current_payment - new_paymentCurrent Total Cost
current_total_cost = current_payment * current_num_paymentsNew Total Cost
new_total_cost = new_payment * new_num_paymentsVariables
| Variable | Description | Default |
|---|---|---|
current_balance | Current Loan Balance(USD) | 250000 |
current_rate | Current Interest Rate(%) | 7 |
current_remaining_years | Years Remaining on Current Loan(years) | 25 |
new_rate | New Interest Rate(%) | 5.5 |
new_term_years | New Loan Term(years) | 30 |
current_monthly_rate | Derived value= current_rate / 12 / 100 | calculated |
current_num_payments | Derived value= current_remaining_years * 12 | calculated |
new_monthly_rate | Derived value= new_rate / 12 / 100 | calculated |
new_num_payments | Derived value= new_term_years * 12 | calculated |
How It Works
When Refinancing Makes Sense
Refinancing replaces your current mortgage with a new one, usually at a lower rate. The question is whether the interest savings outweigh the closing costs. A typical refi costs $3,000-$6,000 in fees. If the new rate saves you $200/month, you break even in 15-30 months. If you plan to stay in the home longer than that, refinancing pays off.
The Formula
Monthly Savings = Old Payment - New Payment Break-Even Months = Closing Costs / Monthly Savings
The new payment is calculated using the same amortization formula as a mortgage: P * [r(1+r)^n] / [(1+r)^n - 1], but with the remaining balance as principal and the new rate and term.
When to Use This
When rates have dropped at least 0.5-1% below your current rate, or when your credit score has improved significantly since you got the original loan. Also useful when switching from an adjustable-rate mortgage to a fixed rate for predictability.
What Most People Miss
Refinancing restarts your amortization schedule. If you're 10 years into a 30-year mortgage and refinance into a new 30-year mortgage, you just extended your total payoff to 40 years. Even with a lower rate, you might pay more total interest over the life of the loans combined. Consider refinancing into a 20-year term instead to avoid this trap.
The Rate Drop Isn't Everything
Closing costs vary wildly. Some lenders offer "no-cost" refinances but build the fees into a slightly higher rate. Compare the total cost over your expected time in the home, not just the rate. A 5.5% refi with $2,000 in costs beats a 5.25% refi with $8,000 in costs if you're moving in 5 years.
Common Mistakes
Worked Example
You owe $250,000 at 7% with 25 years remaining. You can refinance at 5.5% for 30 years.
- 01Current monthly payment: $250,000 at 7% for 25 years = $1,767.63
- 02New monthly payment: $250,000 at 5.5% for 30 years = $1,419.47
- 03Monthly savings: $1,767.63 - $1,419.47 = $348.16
- 04Current total remaining cost: $1,767.63 * 300 = $530,289.00
- 05New total cost: $1,419.47 * 360 = $511,009.20
When to Use This Formula
- Deciding whether to refinance your mortgage when rates drop — the calculator shows how many months until closing cost savings are recouped through lower payments (the break-even point).
- Comparing a rate-and-term refinance (lower rate, same payoff timeline) against a cash-out refinance (new larger loan) to see total cost differences.
- Evaluating whether refinancing from a 30-year to a 15-year loan makes sense given the higher monthly payment but dramatically lower total interest.
- Determining if refinancing is worthwhile when you plan to sell in 3-5 years — if the break-even point is 4 years but you move in 3, you lose money.
- Assessing the impact of buying down the rate with points versus taking the no-points rate — the refinance calculator shows whether the upfront cost of points is recovered during your expected ownership period.
Common Mistakes to Avoid
- Ignoring closing costs in the comparison — a lower rate means nothing if $8,000 in closing costs takes 7 years to recoup and you plan to sell in 5. Always calculate break-even.
- Restarting a 30-year clock without realizing it — refinancing a loan with 22 years remaining into a new 30-year loan reduces monthly payment but adds 8 years of interest. Compare total cost over the same time horizon.
- Comparing only the interest rate and ignoring APR — the APR includes points and fees, so a 6.5% rate with 2 points may cost more than a 6.75% rate with no points, depending on how long you keep the loan.
- Forgetting to account for the tax impact — if you deduct mortgage interest and your rate drops significantly, your tax deduction also drops. The net monthly savings are smaller than the raw payment difference.
Frequently Asked Questions
When should I refinance my mortgage?
Refinancing typically makes sense when you can reduce your rate by at least 0.5-1%, plan to stay in the home long enough to recoup closing costs, and have good credit for the best rates.
What are typical refinance closing costs?
Closing costs typically range from 2-5% of the loan amount. On a $250,000 loan, expect $5,000-$12,500 in closing costs.
Should I refinance to a longer term?
A longer term lowers monthly payments but may increase total interest. Consider refinancing to the same or shorter term if you can afford the payments.
What is a break-even point when refinancing?
The break-even point is how long it takes for your monthly savings to cover the closing costs. Divide your total closing costs by your monthly savings. For example, $6,000 in closing costs with $200/month savings means a 30-month (2.5-year) break-even. Refinancing only makes sense if you plan to stay longer than that.
Ready to run the numbers?
Open Refinance Calculator